FxWirePro: NZ macros produce upbeat prints but China still threat for Kiwis – Stay short hedged using near month tenors

In New Zealand, global dairy auction numbers have produced upbeat numbers, 3.6% versus previous 3.1%, while unemployment claims have reduced from the previous 5.2 to the current 4.9% against the forecasts at 5.1%. Commodities performed poorly overnight, oil and iron ore each down around 5%. AUD and NZD thus failed to benefit from the broad US dollar weakness seen overnight. We expect the Reserve Bank to hold the OCR at 1.75%, but with a stronger signal that the next move in rates will be up as the inflation in the region is now close to the 2% target midpoint.

Since China has been the major trade partner of New Zealand and the kiwis’ trade exposure towards China is considerable, we would like to shed some light on Chinese macroeconomic numbers.

The Caixin Manufacturing PMI in China fell to 50.3 in April of 2017 from 51.2 in March and below market consensus of 51.2. The reading pointed to the weakest expansion in the factory activity since September 2016, as output, new orders and new export orders rose at slower paces amid weakening business confidence and employment fell the most since January.

While the Caixin China Services PMI dropped to 51.5 in April of 2017 from 52.2 in March and missing market consensus of 52.6. It was the lowest reading since May 2016, these set of economic numbers have been disappointing from NZ perspective. Although NZD gets a cushion from price slides, PMIs the leading indicator of economic health signals how businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy, hence here in this case these numbers are sending negative message to NZD.

Accordingly, to arrest these bearish risks we advocate below FX derivatives:

Well, at spot reference: 77.052, contemplating lingering bearish indications, on hedging grounds we recommend shorting near-month month futures as the underlying spot FX likely to target southwards 76.259 levels in near run.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.