FxWirePro: Three Antipodean trades after monetary policy season, Trios to tackle bearishness tactically

In this write-up, we emphasize on the bearishness of antipodeans. The AUDUSD has been one of the vulnerable and worst pairs in the broad-based US dollar rally since the June FOMC and ECB meetings.

For now, all monetary policies from RBA, Fed and ECB for July month are over. The pair is still below weekly fair value estimate. Amid the lingering trade tensions between US-China that remain the market focus in the days to come, risks are to 0.72/0.73. But Australia’s key commodity prices have been broadly resilient; especially LNG and thermal coal, suggesting AUD downside should be contained multi-month. The RBA should also be optimistic on Australia’s growth outlook in its Aug statement.

In Australian business confidence will likely ease, while wages and employment will provide further evidence of a gradual tightening in the labour market, but not enough to change the RBA’s assessment. The RBA continues to indicate that the next move in the cash rate will be higher, which is consistent with the view of an economy growing a bit above potential, and a falling unemployment rate. Nonetheless, ongoing low inflation and slow wage growth suggests little need to raise interest rates any time soon. We continue to expect the RBA will leave rates on hold for some time.

The US dollar should strengthen further if the Fed hikes further this year, and that will push NZDUSD lower. In addition, the NZ-US interest rate advantage has been eroded, removing one of the previous attractions of the NZD. Further, domestic data is indicating the NZ economy is slowing.

Increase short Antipodeans through EURNZD, while holding short NZDUSD (covered put) and AUDJPY (put vs call spread). At this month’s RBNZ OCR announcement, the central bank kept the policy rate on hold at 1.75%. The RBNZ retained full flexibility on the next move, noting that “…we are well positioned to manage change in either direction –up or down –as necessary.” As we expected, there was a slightly dovish tinge to the Statement, with the outlook on GDP growth downgraded, and the assessment of spare capacity revised higher.

We also keep a short position in AUDJPY through a put vs call spread switch. This is the one defensive trade that hasn’t performed over the past week, although with Trump now potentially flagging a desire to withdraw from WTO, we remain comfortable with this as a hedge to a likely escalation in global trade tensions.

Bought EURNZD at 1.7248, we still continue to uphold this trading stance, stop only at 1.6720.

Long a 3m AUDJPY put, strike 77.50, short a 3m AUDJPY 81.25-83.50 call spread.

Short NZDUSD through a covered put. Short cash from 0.6893, short a 2m 0.6677 NZDUSD put for 39.6bp. Current profit +1.46%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly AUD is inching at -113 (which is bearish), NZD spot index is flashing at -94 levels (which is bearish), while articulating (at 08:38 GMT). For more details on the index, please refer below weblink:


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