FxWirePro: Spotlight on Bearish Antipodeans, Fundamental Driving Forces and Trade Strategies

This write-up is to emphasize on bearish antipodeans (AUD and NZD) via shorts in AUDCHF and NZDJPY put spread. 

NZDUSD’s potential for 0.6750 during the next few weeks if the Fed delivers dovish guidance with its 25bp rate cut on 31stJuly. Then, in August, the RBNZ should cut the OCR, noting the soft patch in the economy, which should send the NZD below 0.6600.

As far as AUD is concerned, having tumbled from 0.7200 mid-April to the high 0.68s mid-May as soft Australian data and RBA rhetoric pointed to a minimum of 2 cash rate cuts, AUDUSD price action has been a lot more mixed in recent weeks. Five-year highs on iron ore prices have provided some light amid gloom for other key commodities and record short A$ positions by real money accounts in futures markets suggest plenty of bad news priced in. Increased pricing for Fed easing in response to US trade battles with China, Mexico et al also limits AUDUSD downside.

We expect rallies to remain modest and some trade with a 0.67 handle would not surprise, but we retain our 0.68 end-Sep forecast.

The RBA may have eased proactively in June which may buy the Bank some time before easing again, but this will not necessarily preclude AUD from fading further in coming weeks. In particular, the ongoing deterioration in the global growth backdrop and negative trade outcomes are naturally bearish for the currency.

Furthermore, rate cuts to date have brought the currency closer into low-yielding status (policy rate now just 1%) which will continue to put capital outflow pressure on the economy, even if the current account deficit has improved in recent years (still -1.6%). The currency may receive some support from ongoing-elevated iron ore prices as well as some impetus from the fiscal side, but ultimately we don't view this as sufficient for overcoming negative global drags. And while the RBA may be paused, RBA commentary and data will continue to inform the outlook which over time should serve to narrow the 20bp gap between current OIS pricing and our forecasted terminal rate (0.50%). Upcoming data like unemployment next week should continue to help calibrate those expectations. We stay short against low-yielding CHF, which will benefit from its surplus status as well as the renewed lower-yield environment post-Powell.

Meanwhile, G10 commodity currencies have generally outperformed since the inception of our NZDJPY bear put spread in May, and NZD is no exception. Still, NZD should be liable for protracted downside given a similar scenario of falling yields with a relatively-worse balance of payments position compared to AUD. 

On top of that, the RBNZ has proven quite sensitive to global developments; this week’s testimony from Powell focusing exclusively on global uncertainty is likely to galvanize a response from the Bank. Indeed, their next meeting in August is live and is well-priced, but there remains potential to reload their easing bias to help draw down rates and FX further. 2Q inflation next week may present some event risk (consensus is for a rebound to 0.6% q/q, JPM 0.5% from 0.1% in Q1) but this ought not to deter the medium-term RBNZ path at this juncture. 

The risk to these trades comes from an ongoing strengthening in high beta FX given a more dovish ECB and Fed stance. As discussed earlier, we partially hedge this exposure via short EURNOK. Hence, below recommendations have been given:

Hold AUDCHF in cash, marked at -0.50% 

Hold a 6m NZDJPY put spread. Paid 1.07% on 31stMay. Marked at 0.51%. Courtesy: JPM & Westpac