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The long USDJPY trade was motivated by the prospect for a further adjustment higher in yields (USDJPY continues to have the highest sensitivity of any major currency to US yields), while the re-initiation of NZD shorts last week was a hedge for poor risk sentiment, ongoing CNY weakening and China tail risks to growth. Over the past week, the performance of these trades has been mixed.
USDJPY trade has recouped some of its losses given the rebound in equities while the NZDUSD trade is underwater following positive news reports on the US-China agreement.
The RBNZ shifted back to a neutral bias (from an implicit easing one) at the Nov MPS, following a strong run of data. It expects to remain on hold over the next year at least, and we agree. That should cap 2yr yields at 2.30%, with a lower bound being 1.95%. Longer maturities (5yr to 10yr) will partially follow US rates, but that relationship has weakened considerably this year.
The erratic nature of news flow is one reason why we suggest NZDUSD shorts via options last week.
The trade is now deep out of the money but we maintain exposure given tail risks to high beta FX as noted earlier.
Trade tips:
Long 2m at-expiry digital NZD put/USD call (strike: 0.6425) for 15%.
Bought USDJPY in October at spot reference of 111.625 levels. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly NZD spot index is flashing at -54 levels (which is bearish), hourly USD spot index was at 120 (bullish), and JPY is at -59 (bearish) while articulating at (11:18 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
