FxWirePro: Bullish, bearish scenarios and hedging vehicles of Aussie and Kiwi dollar

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.

Bullish AUD scenarios:

1) China eases policy and commodities rebound;

2) The RBA adopts a more hawkish tone to its communications.

Bearish NZD scenarios:

1) The housing market slowdown becomes disorderly

2) The 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.

Hedging framework:

We add to a soft NZD short and thereby, initiated last week by adding a long in AUDNZD via options 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 (1.0900-1.1195 call spread vs 1.0675 put).

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