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Buy EURAUD, stay long EURNZD, stay short AUDJPY but convert from a covered put to outright cash short
The outbreak of trade frictions and the prospect for additional action in economically more important sectors where China is more clearly in the policy cross-hairs, validates and reinforces our bias to own defensive exposure in FX as global growth comes off the oil and real yields in the core rise and the Fed mulls a more challenging pace of tightening.
The playbook for trade friction is most clearly bullish for alternative reserve currencies such as JPY, EUR and CHF, and typically negative for currencies that are either more sensitive to growth through commodity prices or have current account deficits to finance.
We consequently add an EURAUD position to the existing short in AUDJPY.
In addition, we restructure the covered put in AUDJPY to maintain the delta to the theme, buying back the put as this is now heavily in-the-money and roll instead into an outright cash short. Beyond the immediate focus on US trade policy, we believe that relative monetary policy and balance of payments support a positive outlook for both EURAUD and EURNZD.
Next week’s 4Q GDP data in Australia should remind investors of the growth challenges facing the RBA and reinforce the sense that it is comfortably on hold for the foreseeable future, unlike the ECB whose meeting next week should maintain the expectation for a change in policy within the coming year, even if the (redundant) QE easing bias is maintained for one more meeting until April.
The drawdown in EURAUD would be more manageable than on EURUSD (and in any case probably not much more than 2%).
Trade recommendations:
Buy EURAUD at 1.5880, stop at 1.5575.
Sold AUDJPY Feb. 9th at 85.19. Marked at +4.1%. Lower stop to 83.00.
Long a 9m 1.80 EURNZD AED call with a 3m 1.80 window KO. Paid 17.5% on November 21. Marked at 21.1%.
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