JP Morgan, that’s who!

What ya think of this?

  • We recommend going long AUD/NZD
  • The underperformance of AUD is notable since it is one of the three G10 countries where interest rates actually increased relative to the US
  • The weakening in AUD likely reflects the rich valuations from a couple of weeks ago—at that time, it was screening as one of the richest currencies on our short-term fair value models, particularly vs. NZD
  • However the recent weakening has brought AUD/NZD to near fair value, presenting a better entry level to go long
  • Our strategy for most of the year was to be bearish on AUD/NZD given the divergence in central bank policies. However, going forward we think that AUD is likely to be the outperformer given the divergence in housing and relative commodity prices
  • We now expect the cross to trade in 1.09-1.15 range, likely with more upside in 2015. Moreover, data momentum has been quite strong in Australia … something that the currency has ignored so far, and weak in New Zealand
  • Specifically, we recommend buying a 2- month 1.1150 AUD/NZD call (35 delta) vs. selling a 1.12 call, RKI 1.14. This trade gives maximum leverage of 8.5:1 if the RKI is not triggered and leverage of 1.75:1 if the RKI is triggered.

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Thoughts welcome!