Shortkiwidollar
NZDUSD: TECHNICAL ANALYSIS - TARGET 0.701 BUT USD WEAKNESS?NZD$ Technical Analysis:
Moving Average/ fair price gauge:
1. Kiwi looks rich here at the lower 0.72 level which, significantly above the 3m and 12m which sit at 0.703 and 0.690 respestively, whilst the 1 trades at 0.711.
- However, going into RBNZ where they are expected to be dovish (discussed in detail in attached post), these MA levels fall nicely in line with areas of price action suppport and thus will be used as profit targets - thus 0.711, 0.701 and 0.691 are my TP1 TP2 and TP3 levels however, given the bearish bias >50% of my lots will be squared at between the 0.701 and the 0.61 level. The 0.711 level is an intermediate TP, which is better suited for 0.718 shorts vs the 0.722 shorts that i currently hold. 0.691 is possible but is skewed towards the bottom of the range, with 0.681 at the very LHS - a 50bps cut and strong dovish forward guidance e.g. like BOE will likely offer us here - cable managed to fall some 350-400pips which ceteris paribus takes kiwi into the 0.681 level also.
Volatility
1. Realised vol has contracted aggressively in the last few days as the daily ranges have tightened unsurprisingly going into RBNZ - IV on the other hand also unsurprisingly has traded bid as option positioning increases as investors place bets on RBNZ.
- Net bets to date look to be bearish, with current 25d risk reversals skewed to the downside at -2.6vols, and across the view we observe a -0.5 to -1 downside bias reflecting the expected RBNZ dovish pressure expected.
- 50d ATM vols trade currently at 30%, 14.8% 1wks, 12.3% 2wks and 11.3% 1m - clearly the RBNZ and following speakers are steepening the vols here. Though interestingly past current and 1wks, 2wk and 1m IVs are flatter than RV, indicating the market expects kiwi price action to settle after the next week which could mean we see NZD$ move post RBNZ then stabalise at this level vs obseriving continued seesaw action of the past 6wks e.g. 0.70-3 ranging.
- Interestingly RV has developed a 60-80% correlated pattern of aggressive/ volatile price action emerging AFTER RV reaching the 5.0-5.5 level (current levels) so assuming my/ markets RBNZ forecasts are correct one would expect this move to be lower (ive highlighted these moves).
Standard Deviation:
1. On the daily weve seen SD normalise from the previous levels where kiwi tested the +2 levels after realising these upper 0.72 levels for a sustained amount of time now - hence NZD$ trades at pretty normal levels for the linear regression though an uptrend as now formed vs sideways/ flat being the previous trend. However, I am betting on the RBNZ offering kiwi lower and realising some days below the 0.70 which should see the kiwi trade at 0.70 as an average price at years end - assuming the RBNZ has seen RBA and BOE (and the difference in response and will use this to make their policy effective).
SHORT NZDUSD: GOLDMAN SACHS FORECASTS 0.68, 0.64, 0.62 GOLDMAN SACHS EXPECT 3 RBNZ RATE CUTS OF 25BP APIECE IN AUG, NOV AND MAR.
In a scheduled "Economic Update" published on Thursday, the RBNZ signalled a significant strengthening in its easing bias, and dovish shift across its views on domestic inflation and domestic/global growth. At the heart of many of these changes is renewed concern about the elevated NZD. In our view, these changes make clear that the RBNZ is positioning for a deeper easing cycle, notwithstanding ongoing risks to financial stability from rising house prices.
NZDUSD Targets:
- 3 Month: 0.68
- 6 Month: 0.64
- 12 Month 0.62
This is largely inline with my previous posts/ reaffirms my short view of NZD$ - especially with the possibility of 50bps of cuts increasing for this year (GS citing two cuts); Plus I also see increased USD strength over the medium term as rate hike expectations/ implied probabilities ever grow - Fed Funds Futures Opt Implied probs now trade at 19.5% for Sept, 20.8% Nove and 40% for Dec, up from yesterday at 18.8, 20 an 39.8 - the firsk-on bias already started today will likely see these probabilities continue to strengthen until the end of the day.
The Probability of 2 hikes this year is also becoming an ever stronger possibility with 2 hikes pricing at 7.5% in Dec - and with July Pricing a hike for the first time since Brexit at 2.4%
SHORT NZDUSD: RBNZ DOVISH ECONOMIC ASSESSMENT HIGHLIGHTSThe RBNZ was dovish in their economic assesment and IMO used it to communicate their 100% commitment to a OCR cut. Key drivers of this view were quotes such as "futher policy easing will be required, and monetary policy will remain accomodative.", "NZD currency strength makes it difficult to hit target inflation" and "NZD exachange rate is too high stronger NZD implies inflation outlook will be weak"
So clearly there is no illusion as to the RBNZ's August 10th decision. Perhaps the only question, given the extensiveness of the dovish rhetoic/ comments is how much will the RBNZ cut? could it be 50bps rather than than the usual 25bps given how aggressively dovish they have came out on the record.
Trading Strategy:
1. From current levels there is little interest in adding fresh shorts - shorts still standing from 0.72/3 are firm and should be held. A 25bps cut IMO will take NZDUSD to 0.68TP and a 50bps cut, with the shock pricing it even lower, likely to 0.65/4.
2. Risks to this downside view continue to be RBNZ driven. As we have seen in the past 2wks Kiwi has traded at the mercy of the RBNZ - 2wks ago when the OCR rate cut initially began to price us to 0.70, the RBNZ came on record talking about kiwi house prices limiting the ability to cut the OCR which caused NZD$ to rally back to 12m highs, where then a week later, the RBNZ announced their emergency "economic assesment" which completely flipped the script back on the dovish side - now this week the assesment has been released and is dovish with the rate hike being price now.
- But in the 3wks between now and the rate decision, im sure there is a level for more RBNZ comments to conflict this dovish sentiment.
RBNZ Economic Assessment Highlights:
-RBNZ: Further Policy Easing Likely
-RBNZ: Will Continue to Watch Emerging Flow of Data
-RBNZ: House Price Inflation Excessive
-RBNZ: Bank Lending Curbs Aim To Limit Financial Sector Instability
-RBNZ: Many Uncertainties Around Outlook
-RBNZ: High New Zealand Dollar Adding To Headiwinds For Dairy, Manufacturing
-RBNZ: High NZ Dollar Makes It Harder To Achieve Inflation Target
SELL NZDUSD: EYES ON CPI PRINT 23:45GMT - >0.5%=0.73; <0.4%=0.67Short NZDUSD based on low CPI/ inflation = an RBNZ OCR cut is 90% likely
- 105 mins after market open at 23:45GMT NZD releases their June CPI print.
- In all RBNZ mandates they reiterate how they consider CPI to be their "main/ sole" target or dictator of the monetary policy they set (check any of their minutes etc).
- Their target is 2%, plus recently they announced that they would hold an "emergency"/ brought forward economic assessment (this lead to increased short bets on NZD$ at the back of last week (with NZD$ falling from 0.733 to 0.710) as many speculated that this meant the RBNZ has a heads up on the CPI print - e.g. its bad).
- See here for more details on NZD CPI and likelihood of a RBNZ OCR cut: www.bloomberg.com
- In simple terms if CPI fails to grow on the quarter for NZD e.g. 0.4% or has in fact fallen e.g. 0.3% or less - it is highly likely that the RBNZ will cut their OCR rate, in order to boost the CPI, which in turn will send NZD$ likely to a terminal rate of 0.67 (could be as much as 0.65), hence why last week we saw shorts increase on the pair as fast money tries to front run the market/ print.
Trading Strategy - Short NZD$ if CPI print misses or equals 0.4% - Stagnant/ low Inflation = RBNZ OCR cut likely:
1. Personally I dont have any interest in playing the long kiwi$ side e.g. if the print is higher as; 1) the RBNZ isnt happy with NZD trading so well (due to its deflationairy pressures), so action could come to reduce the NZD. 2) There is approximately 300-400pips of downside from here (at least) if a RBNZ OCR cut comes, whereas a no cut will likely see NZD$ Drift to 0.73 (maybe higher) so the risk:reward complex isn't as attractive to the upside IMO.
2. I will be waiting for the CPI print at 23:45GMT - if it is lower or equal to 0.4% I will Short NZDUSD 2lot@Market price; 0.68TP1 0.67TP2 0.65TP3 .
3. This trade is effectively betting on an RBNZ OCR rate cut; See attached posts for more details but this is already highly likely - and IMO is a definite if CPI is 0.4% (even more so if it is lower). Ideally id love to see 0.3%.
- The rate cut is ranked likely if CPI comes in at 0.4% or less because 1) Inflation is the RBNZ key target, so stagnation is what they have to avoid - a rate cut is the likely tool they'll use given they have one of the highest CB rates in the developed world; 2) the NZD dollar is very expensive across the board and the RBNZ have communicated their dismay regarding the strength of the currency (e.g. saying its very strong/ causing disinflationairy pressures) - so a OCR cut is also the likely response if the RBNZ wants to depreciate the NZD dollar against all of its trading partners; 3) An OCR cut will ease any of the Brexit Commonwealth Headwinds that may or may not drift into NZD's economy of negative impact - so as these 3 reasons are compounded I believe an OCR cut is made ever more highly (80-90%) likely thus bearish bets against NZDUSD make sense to me from here.
3. This CPI trade, if comes in on target (0.4% or less), is also good as LDN and NY session's will have 8-14 hours until they start - so you will be able to get ahead of the market/ mostof the largest FX flows. Though the Asia session will be in full swing so dont expect an easy ride - IMO fingers should be on the trigger to execute the short immediately if 0.4% or less is seen - NZDUSD will likely drop 200+pips in less than 30seconds if these figures are the case (if not even quicker).
Any questions or comments please ask - reading the "sell nzdusd @0.73 - tp 700pips" post ive attached helps support this short Kiwi$ trade
SELL NZDUSD @0.73 - TP 700PIPS: BREXIT, RBNZ, FED & USDJPY HEDGEShort NZDUSD is in my top 2 FX Trades for several reasons:
1. NZD is considered the riskiest G10 currency cross, so NZD trades weaker in risk-off markets, or when equities/ SPX trade lower (you can see the high correlation with SPX at the bottom of the graph).
- With Brexit occurring last week, global risk has increased, this is especially the case for NZD due to commonwealth connections. Therefore NZD is likely to come under pressure in the future as risk-off sentiment continues to dominate, as the US Election nears, Global growth worries continue (Japan, Europe, China) and Brexit/ uncertainty about further EuroArea exits continues to intensify - we can see Gold and US Treasuries continue to gain supporting the risk-off view and thus supporting selling NZD. Also, risk-off encourages $ buying as a safe haven deposit on the Brexit backdrop.
- Further, going into earnings season next week, historically risk currencies (NZD) perform poorly as investors seek safer assets to hedge against earning surprises, thus this helps NZD selling and USD buying. Plus, most investors will want to hold some $ cash in order to fulfil their earnings based equity trading, so this also helps the short Kiwi$ trade by increasing $ demand relative to NZD.
2. The RBNZ Meeting on the 10th August is likely to be dovish and I 80% expect a rate cut of 25-50bps from 2.25% to 2.00%-1.75% , as;1) Brexit risks are weighed in on and potentially priced into a rate decision, in follow up to the supportive/ dovish statements from RBNZ members immediately after the Brexit decision and 2) NZD Macro Environment has performed poorly since the March Rate cut from 2.5% to 2.25% e.g. The last prints still consistently dragging: Retail Sales at 1.0% vs 1.1%qoq & 0.8% vs 1% Q1qoq; CPI 0.4% yoy, 0.2% qoq; Unemployment Rate at 5.7% vs 5.5%. 3) the RBNZ has a historical pattern of cutting their rate every third meeting, and this August meeting is the third meeting. Plus it will have been 5 months since their last cut in March - this also historically is a large time for a another rate cut as previously to that the RBNZ cut in December, Dec-Mar which was only 3 months, and before that in october (oct-dec) which was 2 months so the odds are good if NZD data continues to be bad given the time since the last cut of 5 months is relatively large. And the gap since their last meeting at June 10th is 2 months which is the biggest gap they have.
- Risks to the RBNZ Rate cut view are that;1) Brexit risks are de-priced due to UK Political skulduggery pushing the likelihood of the brexit into 2017 (if at all) 2) Their Inflation, Employment and GDP data manage to recover and show structural signs that the rate at 2.25% is sufficient for continued economic recovery e.g. NZD May Employment Change print surprised to the upside at 1.2% vs 0.8%, and their June GDP outperformed for Q1 at 0.7% vs 0.5% qoq & 2.8% vs 2.6% yoy. So if the CPI and employment data due to be released before the RBNZ August 10th meeting shows a continued/ structural/ aggressive recovery this will reduce the likelihood of a rate cut. Nonetheless, my money is that this isn't the case (with data continuing to trade subdued) and I therefore expect them to provide reassurance to markets with a strong dovish tone, and a 25bps cut - citing Brexit and non-outstanding economic indicators as the impetus for the changed policy.
*It should be noted, in order for me NOT to consider a 25bps cut likely in August we would have to see an outstanding CPI and employment print e.g. CPI 1.0%-0.8% (0.4% last), and unemployment 5.3/4% (5.7% last), given it has been 5 months since the last cut - the RBNZ would be expecting to see such figures to consider the current rate of 2.25% as working/ sufficient.
