Kiwi dollar has been gaining in the recent times as the RBNZ ended its easing cycle on 10 Nov and will remain on hold for a long time. That will anchor the short end somewhat (although the 2yr-OCR spread – one measure of stretchedness – could rise further given historical precedents) with the long end free to follow offshore yields.

The NZD TWI looked to consolidate at an annual high of 79.25 against USD overnight. Seasonally, the Kiwi dollar usually lifts at this time of year and with commodity prices continuing to push higher and buoyant manufacturing yesterday adding upside risk to Q3 growth figures.

On the flip side, the broader reflationary trade and higher oil prices is also supportive of SEK outperformance as it will likely give the Riksbank some comfort given its preoccupation with inflation.

The forecast shows a 22% depreciation in NZDSEK by Q4’17. Thus, we recommend buying a 6m NZD put/SEK call, strike 6.10 for 1.47%. Spot reference 6.5193. Marked at 0.94%.

This trade has underperformed in the interim but the valuations argument remains intact. We recommend this trade primarily motivated by valuations with NZD the richest G10 currency in our universe in REER terms and SEK the second cheapest after GBP (Diverging fortunes: FX value to trump carry in 2017).