Risks to our AUD and NZD short trades
In placing the short position in AUD earlier this week, I had in mind persistent strength in the USD on firming confidence in the recovery in the US and higher US yields, in spite of diminishing expectations for any near-term progress on tax reform.
The Comey affair has shifted the dynamics somewhat to be less USD supportive. Most think this issue will simmer and impede efforts by the administration to drive its reforms on tax and infrastructure spending through Congress.
The dollar is so far relatively stable since the market had already downgraded its outlook for tax reform. However, the Comey affair has made tax reform a more distant prospect, generated broader uncertainty, and is a major distraction for the market.
There has to be some chance that the Trump administration will be sidelined by the possible appointment of an independent prosecutor to investigate Russian interference in the election and collusion with the Trump election campaign.
There is a risk that US equities lose steam, and US bond yields fall-back, weakening the USD. So far there has only been a small setback in US yields and equities.
In recent weeks some stronger US economic data, a resilient Fed view on the economic outlook, and stronger than expected US earnings data appeared to draw attention away from the legislative process, and boost the USD, equities and yields. With the drama in Washington, the onus will be even more on economic reports to drive confidence in US capital markets.
This brings into play the CPI, retail sales and UoM consumer confidence data due on Friday in the USA.
The question I face then is to close the short positions in AUD and NZD for now. I did not enter these trades with a good location, both have been established after significant falls and near supports. There is risk of being stopped out on a temporary reversal.
Supporting the short trades to some extent may be the downgrade by Moodys of banks in Canada. The CAD may be weaker if not for a recovery in oil prices. OPEC ministers are reported to support extending the production cuts for another six months.
The reasons for the downgrades largely also apply to Australian banks. Moodys placed Australian banks on negative watch in August last year. Australian banks equities are still struggling after the government levy. Some see it as part of broader regulatory pressure on banks and raising funding costs.
There appears to be increasing concern and risks attached to high household debt, and regulatory pressures on banks that may tighten credit conditions. However, these risks are likely to play out more clearly in a rising US and global yield environment.
Chinese iron ore futures remain around their lows, but Chinese equities bounced from lows, bond yield have been stable recently. Regulators in China may feel they have enacted enough credit tightening lately, stabilising Chinese capital markets for now, lessening the downward pressure on the AUD.
We are are a bit more worried about a possible short-term rebound in AUD and NZD, but are sticking to the strategy for now.
Short one unit AUD/USD at 0.7343; s/l 0.7438
Short one unit NZD/USD at 0.6833; s/l 0.6928 (this s/l has been lowered somewhat)
short NZD Comment
I sold NZD listening to the press conference where I was struck at the dovish interpretation of Wheeler on inflation and rates. The RBNZ significantly surprised me and the market with its failure to at least raise its inflation and rates forecast somewhat.
I have written about the MPS and press conference in an AmpGFX report. (http://ampgfxcapital.com/reports/rbnz-not-jumping-at-inflation-shadows/)
The rationale suggests that the RBNZ will not be quick to respond to any signs that growth is strong, and inflation is picking up (if that happens).
The NZD had been holding up much better than the AUD recently, and it has now more clearly broken the lows in December last year.
Both the AUD and NZD appear to be responding more to rising US yields recently, consistent wit their very narrow yield advantage. With an investor focus on equity flows and US yields attempting to shake off the latest Trump controversy, we are attempting to stay short AUD and NZD.
Note CAD fell sharply on a Moodys cut downgrade of its major banks. Too bad for me they didn’t do that a day earlier, I might have had a chance of staying in the EUR/CAD long.
Iron ore prices have fallen to a new low for the year in Asia today, Shanghai stocks continue to underperform
Short one unit AUD/USD at 0.7343; s/l 0.7438
Short one unit NZD/USD at 0.6833; s/l 0.6948