The Trade Week Ahead – Currency Point: Cross of the Tasman
With macro risk at very high levels in Europe – Brexit taking several sharp turns and the EU heading into the European Parliament elections the EUR and the GBP are becoming hard to touch as direction is changing like the wind.
Thus, it is prudent in this current environment to look to pairs or crosses that one can removed this geo-political risk. Right now, in my option, that cross is AUD/NZD.
The AUD has begun to outperform its Tasman counterpart as recent Australian economic data has surprised to the upside. Retail sales, balance of trade and employment remain above consensus forecasts and although there is deterioration in the housing market and growth risks leading to possible RBA rate cuts, the 40bp of cuts priced in for 2019 is well-flagged and in my view overdone.
Thus the trade has actually materialised from the NZD side. The communication from RBNZ has seen a significant shift in ‘view’ and has a dovish tone. This has led the market to believe the Bank is gearing up to cut rates by 25bp at the May meeting to 1.50%. Thus our short view of NZD
The differential in the AUD/NZD has been building for a while, the fall to $1.03 was built off the language and view changes from the RBA in February and the March statement. This is clearly overdone and ignores the RBA’s ‘want’ which is for rates to actually increase. If the RBA can sit on its hands it will and that data so far is backing this idea.
Secondly, Australia will benefit from constructive changes in the US-China trade war and overall increases in sentiment around the Chinese economy. Thus, an AUD/NZD long call is one we think will benefit over this period as these two point ramp up.