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We forecast AUD to decline to USD0.72 by 3Q’18. RBA commentary this year continues to reinforce Australia’s policy divergence with the G10, but the central bank now seems more comfortable with the level of AUD. We expect both monetary policy divergence and minimal support from commodity prices to push the currency lower over time.
Hence, we advocate shorts in Antipodeans through EURNZD and AUDJPY (put vs call spread). Stay short NZDUSD put.
The short Antipodean view has been motivated by multiple factors, all of which remain intact:
Our RBA outlook (on hold throughout 2018) is anchoring short-maturity interest rates and should keep 3yr swap rates in a 1.80% to 2.30% range, as long as core inflation remains below 2%.
The structural bearish view on both currencies on the expectation that unlike a lot of G10 central banks, the two RBA and RBNZ will remain on hold and
These currencies would be the most vulnerable in G10 given recent escalation in trade conflict.
A key development for these currencies in the past week has been China’s announcement of making its fiscal policy more active in 2H’18 which could improve the tone around commodity FX in general (via its implication for commodities and infrastructure spending), but our expectation is for such optimism to be limited given the downside tail risks to growth from a further escalation in trade conflict.
Nonetheless, that shorts in both AUD and NZD are outsized (refer above chart) are a cause for concern and thus continue to warrant monitoring of the mix in China's policy response in the coming weeks, making us tactical on these trades (a preference for fiscal/ infrastructure over monetary would be more supportive for Antipodean FX).
Near-term seasonals are on the margin are also supportive of our bearish view on high beta FX, as USD typically tends to strengthen in August vs. high beta FX (AUDUSD and NZDUSD on average have weakened by 1.4% and 2.3% in August over the past 5- years, respectively; refer 2nd chart).
Buy EURNZD at 1.7248, stop at 1.6720.
Long a 3m AUDJPY put, strike 77.50, short a 3m AUDJPY 81.25-83.50 call spread. Received 0.5bp.
Short NZDUSD through a covered put. Take profits on short cash from 0.6893 for +0.88%. Stay short a 2m 0.6677 NZDUSD put for 39.6bp. Marked at 9bp. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly AUD spot index is inching towards 72 levels (which is bullish), while hourly USD spot index was at 1 (absolutely neutral) while articulating (at 10:28 GMT). For more details on the index, please refer below weblink:
