THE TWO TRADES - Earlier this week I highlighted two trades I like for 2015. One of them was long oil and the other was long AUDNZD. At the moment, I only have long exposure in AUDNZD, but will be looking to add to the position. As for oil, I am waiting to see if we get one more sharp drop in the sessions ahead, that takes the price below 60, so that I can be long somewhere with a 50 handle. I know there are a lot of knocks against both of these trades at the moment, but this is not something that is unfamiliar to me. As a contrarian, I am always looking for overextended markets that show promise for reversal. But as is always the case, the trick is in the timing. For today, I will focus on AUDNZD.
SIDE BY SIDE - Fundamentally, Aussie has been beaten down again and again, with the market probably pricing in as much bearishness as it can take for the moment. However, I don't believe we have seen Kiwi hit as hard as it should be. If we compare with Aussie, the New Zealand economy is also cooling down, the RBNZ is also contending with lower inflation, the local government is also talking down the currency, and falling commodity prices are also a drag (dairy). So what is it exactly that has AUDNZD at longer-term cyclical lows?
THE X FACTOR - Well, I think the one differentiator is yield. At the moment, New Zealand has a higher interest rate and is perceived as a risk correlated currency. Given that equity markets are still overwhelmingly bid, Kiwi has managed to outperform on this merit against its cousin. But what happens if stocks come off? What happens if there is major capitulation in global equities? In this scenario, Kiwi should be more exposed. The RBNZ is also just now moving away from a mild tightening bias and this still needs to be priced in. As such, there is room for Kiwi underperformance on that front as well. So there you have it. I love AUDNZD in 2015 and will be looking to buy some more around 1.0600 if the opportunity presents.