by Chris Becker
JP Morgan has a trading note out this morning with some “interesting” ideas to go long AUD against the Kiwi (AUDNZD)
Via Forexlive, here’s the short shrift:
- We recommend going long AUD/NZD
- The underperformance of AUD is notable since it is one of the three G10 countries where interest rates actually increased relative to the US
- The weakening in AUD likely reflects the rich valuations from a couple of weeks ago—at that time, it was screening as one of the richest currencies on our short-term fair value models, particularly vs. NZD
- However the recent weakening has brought AUD/NZD to near fair value, presenting a better entry level to go long
As much as I’d like to see the cross at its previous high instead at a new 10 year low, as I pointed out yesterday (NZ is top of my list for retirement places!), I think JPMorgan has misread the dynamics here for a few reasons.
- The RBNZ is more hold rates higher than the RBA as the Australian Terms of Trade slips further than even the agricultural led NZ economy
- This will mean at best a stable rate differential (1% higher in NZD) or at worst, a widening as the RBA cuts to stimulate domestic demand
- Australia is now seen as a riskier safe harbor, leveraged to China’s non-stimulus future, whereas NZ represents a cleaner sheet of linen in a dirty basket for international money
- The reelection of Key’s National Party with not only a clear mandate, but also a stable policy base in stark contrast to the fractious and amateurish effort from Abbott’s Coalition
A forecast and some hope:
- We now expect the cross to trade in 1.09-1.15 range, likely with more upside in 2015. Moreover, data momentum has been quite strong in Australia … something that the currency has ignored so far, and weak in New Zealand
I wouldn’t agree with the “strong data momentum” line – all you need to look at here is the vastly different trends in the unemployment rate: (chart below courtesy of interest.co.nz)
Yes, the NZ economy faces very similar macro risks to that of the Australian, and perhaps this note is all about catching a technical bounce off the 10 year low or maybe more cynically, a short to be unwound by JPMorgan.
I haven’t seen any similar noises to go long Aussie against, well, anything else.