Working Hard For The Money


NOT THE SMOOTHEST - Over the years there have been many trades that have made me work for them before paying off....and this AUDNZD trade is no exception. At the start of 2015 I had said AUDNZD was the trade of the year, and yet here we are, with the market at fresh record lows in April and showing no real sign of reversal just yet. Technically, the market is now oversold across daily, weekly and monthly time-frames and should soon see some form of a correction. Fundamentally, to see such a divergence between two normally well correlated commodity currencies is more than striking. The Australian Dollar has taken a massive hit on RBA easing and ongoing troubles on the domestic front, with this latest slide in iron ore prices doing nothing to help. Meanwhile, the New Zealand Dollar has held up well on a relative basis, with the RBNZ maintaining a more neutral stance, offering the highest interest rate amongst the developed economies.

SAME PICTURE - But New Zealand is not without its own troubles. Dairy prices have fallen off dramatically, while the housing market is a major concern. At the same time, the RBNZ has been quite vocal about the overvalued New Zealand Dollar. So when will it all give out and when will there a be a change of pace for this market. Will AUDNZD ever find a bottom? In truth, the picture really hasn't changed since the start of 2015, and though we have dropped down to parity, the risk reward to the upside is still highly compelling with my forecast for a move towards 1.2000 in late 2015, early 2016 still intact.

How much lower will $AUDNZD go? Via @joelkruger

THE UNWINDING - Ultimately, I think it is going to take a sell-off in the stock market to trigger some overdue relative underperformance in the correlated New Zealand Dollar. Most of the outperformance in the New Zealand Dollar has come from the lure of yield rather than on the domestic fundamentals. So when risk assets start to come off, so too should the long play in the New Zealand Dollar. This unwinding should then benefit the AUDNZD rate. Maybe the RBA is the looser central bank at the moment, but I don't know how much longer this will be the case. I'm betting on it. I am long AUDNZD 1.0215 and will only think about exiting should the market put in a weekly close below 0.9800. The position is leveraged 2X right now, so I don't have too much stress with the trade. I am comfortably sitting back and waiting to see what happens.

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