Long AUD/NZD (From 5-Apr to 6-Apr) Comment on trade rhetoric
Stopped out on 6-Apr, after raising stop loss to near entry level
Real-Time AmpGFX – raised s/l on AUD/NZD, comment on trade rhetoric (Fri 4/6/2018 7:45 AM MT)
The trade war news escalated today. AUD/NZD has appeared to be undermined in the trade war developments over recent weeks. So the news today is a risk to downside reasserting. I have raised the stop to reduce risk. I am not closing outright since AUD/NZD may now be so low that downside is limited. And as mentioned yesterday there are other factors that may support the trade, and we are still likely to move into a cooling period of negotiation that may see some calming of nerves, at least temporarily, although certainly not completely. Trump’s approval rating has improved since the trade rhetoric increased and therefore he is likely to keep peppering with tough trade comments.
Position
Long half unit AUD/NZD at 1.0568; s/l 1.0563; t/p 1.0778
Real-Time AmpGFX – bought AUD/NZD (Thu 4/5/2018 1:23 PM MT)
Bought half unit of AUD/NZD
Comment
The cross has fallen significantly below its yield spreads suggest it should and maybe showing tentative signs of bottoming today, with a double bottom in the last two days, rising above the range in the last two days, and above the low on 28-March.
AUD/NZD – tentative signs of a bottom at least for the short term. (chart)
AUD/NZD vs. yield spreads – note the FX implied yield spread has fallen more than the 2yr swap rate spread this year due to faster widening (increase) in the NZD-USD 2yr cross-currency basis swap than the AUD-USD XCCY BS. (Chart)
The fall in AUD/NZD may relate in part to the China/US trade war. Latest news is a cooling period as negotiations take place. This could help alleviate this risk for a period.
There has been talk that the USD LIBOR/OIS and AUD BB/OIS spread widening may have weakened AUD more than NZD. There is not necessarily a strong argument why this should be the case, but these spreads may be starting to stabilize.
(LOIS chart)
Furthermore, while the AUD may have experienced more BB/OIS spread widening than NZD, the NZD has seen more widening in XCCY Basis swaps. This is likely to reflect a more liquid bank bill market in Australia than NZ, giving banks an alternative from issuing offshore and swapping back to the domestic currency. Either way, the effective borrowing costs for both AUD and NZD have risen by similar proportions. As such, it is hard to see money market spread widening as a factor that should effect AUD/NZD.
AUD may have been undermined by the Royal Commission into misconduct and banks and the wider financial services sector. But Australian banks are largely the same ones as in NZ and any banks’ policy changes in Australia are likely to be mirrored in NZ.
The fall in Australian commodity prices relative to those in NZ could help explain a weaker AUD/NZD. This may also reflect tariffs on steel and economic developments in China. We see an even probability that fears over China’s growth and financial stability do not worsen from here at least not for a while. This would be consistent with a period of cooling and negotiation with the US on trade relations.
AUD/NZD vs. relative commodity price indices (chart)
Recent economic reports appear to be relatively strong in Australia, including around decade or more highs in PMIs for services and manufacturing in Australia, in line with the new long-term highs in the NAB business survey.
Australian AiG PMIs 3mma (chart)
Positions
Short half unit EUR/USD at 1.2268; s/l 1.2357; t/p 1.2028
Long half unit AUD/NZD at 1.0568; s/l 1.0513; t/p 1.0778