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Bullish AUD scenarios: 1) China has been the major trade partner of Australia. As the Aussie trade exposure towards China is considerable, we cannot afford to disregard ongoing upswings in underlying spot FX. If China eases policy and commodities rebound; 2) the RBA implements a more hawkish theme in its cash rates.
Bearish AUD scenarios: 1) The unemployment rate moves back towards 6%, forcing the RBA to respond more aggressively to weak inflation; 2) China data weaken materially.
Bearish NZD scenarios: 1) The housing market slowdown becomes disorderly 2) Migration rolls over due to a shift in government policy; 3) NZ bank funding issues intensify, causing the market to question NZ's ability to attract capital inflow.
Bullish NZD scenarios: 1) Fiscal easing and the increase to the minimum wage drive broader wage inflation and gains in household income, boosting the inflation outlook; 2) Falling global term rates take some pressure off local mortgage rates, allowing the housing market to recover strongly.
Medium term perspectives: Maintain a constructive perspective to extend uptrend as the NZD looks to be vulnerable, while iron ore prices remain elevated, 1.0965 vulnerable. A retest of the 1.20 area is foreseen for now which is quite promising if iron ore’s rally since mid-June continues and global risk sentiment remains elevated.
Hedging framework:
We add to a soft NZD short we initiated last week by adding a long AUDNZD structure, more relaxed FX attitude of the RBA imparts a further bull bias to AUDNZD, albeit entry levels aren't ideal and we favor limited upside structures such as seagulls.
Accordingly, increase bearish NZD exposure through an AUDNZD seagull. Buy 2m bullish AUDNZD seagull (1.0900-1.1075 call spread vs 1.0575 put. Courtesy: JP Morgan
