DB FX Daily: Time again to go short AUD/NZD

[RTFX-Trading]

FX Daily: Time again to go short AUD/NZD

NZD to be Supported by Seasonality in Coming Weeks

There is a reasonably stable seasonal pattern in NZD. Looking at the period from 2001 to 2006, we see consistent strength in Q4 and January (rallying in 20 out of 24 of those months). April has also been a good month, NZD rallying in 5 of those 6 years. Going back further, NZD/USD has strengthened in 11 of past 14 Aprils. The pattern in NZD/USD is to a considerable extent the mirror image of moves in DXY, and also reflects the returns to G10 FX carry. Indeed, if we simply subtract the monthly moves in DXY from those of our FX carry basket, we find that much of the seasonality can be explained (see the first chart below).

Capital flows out of Japan also appear to be part of the story. In particular, the weakness in NZD in March, and the following strength in April, follows the flows that we would expect to see around fiscal year-end in Japan (with repatriation beforehand than redeployment of capital afterwards). The same could be said for the strength in October following fiscal half-year-end. The second below chart shows the purchases of offshore bonds by Japanese residents as a deviation of the monthly average from the overall average. We think the current fiscal year-end in Japan will actually result in outflows from Japan, with the majority of corporate repatriation done, institutional investors on the sidelines, and retail investors continuing to sell JPY (see this week's FX Strategy Weekly for more on this). This suggests that the April rally in NZD may be brought forward a little, and supports our current AUD/NZD short recommendation (which mostly reflect our view that the strength of the NZ housing market continues to support NZD strength in the near term).

Time Again to Go Short AUD/NZD

The rate differential picture strongly also suggests AUD/NZD is likely to trade lower in coming weeks. Although our Australian economists expect the RBA to hike rates by 25 basis points in early April, with a hike in coming months fully priced into rates markets, we would not expect it to boost AUD substantially further. The move in Australian rates has also been mostly matched by moves in NZ rates as the NZ data remains robust. Our caution on the G10 FX carry backdrop does limit the size of the move we are looking for, however, even though the differential charts would suggest a move below 1.10 is likely. We have gone short AUD/NZD (1.1340 when recommendation issued), looking for a move to 1.1100 (near the January lows), with a stop loss at 1.1450 (above the highs of early this week).