QuantumLogicTrading
Short

SELL NZDUSD @0.73 - TP 700PIPS: BREXIT, RBNZ, FED & USDJPY HEDGE

FX:NZDUSD   New Zealand Dollar/U.S. Dollar
5 months ago
Short NZDUSD             is in my top 2 FX Trades for several reasons:

1. NZD is considered the riskiest G10 currency cross, so NZD trades weaker in risk-off markets, or when equities/ SPX             trade lower (you can see the high correlation with SPX             at the bottom of the graph).

- With Brexit occurring last week, global risk has increased, this is especially the case for NZD due to commonwealth connections. Therefore NZD is likely to come under pressure in the future as risk-off sentiment continues to dominate, as the US Election nears, Global growth worries continue (Japan, Europe, China) and Brexit/ uncertainty about further EuroArea exits continues to intensify - we can see Gold             and US Treasuries continue to gain supporting the risk-off view and thus supporting selling NZD. Also, risk-off encourages $ buying as a safe haven deposit on the Brexit backdrop.

- Further, going into earnings season next week, historically risk currencies (NZD) perform poorly as investors seek safer assets to hedge against earning surprises, thus this helps NZD selling and USD buying. Plus, most investors will want to hold some $ cash in order to fulfil their earnings based equity trading, so this also helps the short Kiwi$ trade by increasing $ demand relative to NZD.

2. The RBNZ Meeting on the 10th August is likely to be dovish and I 80% expect a rate cut of 25-50bps from 2.25% to 2.00%-1.75%, as;1) Brexit risks are weighed in on and potentially priced into a rate decision, in follow up to the supportive/ dovish statements from RBNZ members immediately after the Brexit decision and 2) NZD Macro Environment has performed poorly since the March Rate cut from 2.5% to 2.25% e.g. The last prints still consistently dragging: Retail Sales at 1.0% vs 1.1%qoq & 0.8% vs 1% Q1qoq; CPI             0.4% yoy, 0.2% qoq; Unemployment Rate at 5.7% vs 5.5%. 3) the RBNZ has a historical pattern of cutting their rate every third meeting, and this August meeting is the third meeting. Plus it will have been 5 months since their last cut in March - this also historically is a large time for a another rate cut as previously to that the RBNZ cut in December, Dec-Mar which was only 3 months, and before that in october (oct-dec) which was 2 months so the odds are good if NZD data continues to be bad given the time since the last cut of 5 months is relatively large. And the gap since their last meeting at June 10th is 2 months which is the biggest gap they have.

- Risks to the RBNZ Rate cut view are that;1) Brexit risks are de-priced due to UK Political skulduggery pushing the likelihood of the brexit into 2017 (if at all) 2) Their Inflation, Employment and GDP data manage to recover and show structural signs that the rate at 2.25% is sufficient for continued economic recovery e.g. NZD May Employment Change print surprised to the upside at 1.2% vs 0.8%, and their June GDP outperformed for Q1 at 0.7% vs 0.5% qoq & 2.8% vs 2.6% yoy. So if the CPI             and employment data due to be released before the RBNZ August 10th meeting shows a continued/ structural/ aggressive recovery this will reduce the likelihood of a rate cut. Nonetheless, my money is that this isn't the case (with data continuing to trade subdued) and I therefore expect them to provide reassurance to markets with a strong dovish tone, and a 25bps cut - citing Brexit and non-outstanding economic indicators as the impetus for the changed policy.
*It should be noted, in order for me NOT to consider a 25bps cut likely in August we would have to see an outstanding CPI             and employment print e.g. CPI             1.0%-0.8% (0.4% last), and unemployment 5.3/4% (5.7% last), given it has been 5 months since the last cut - the RBNZ would be expecting to see such figures to consider the current rate of 2.25% as working/ sufficient.
5 months ago
Comment: 3. From a USD demand point of view, last week we saw USD lose 160pips against the NZD as Brexit Uncertainty negatively hit the Feds Rate hike cycle expectancy, flattening the curve in the front end which ruled out any hikes until Dec or 2017, fewer hikes = less USD strength.

- However, since the beginning of the week where brexit risks ruled out hikes in the near term, the end of the week managed to turn rate hike expectations around as Brexit likelihood decreased/ shifted into 2017. This helped the Fed fund futures curve recover/ steepen somewhat in the front end, with the implied probability of a hike increasing from 0% to 5.9% for both September and November, whilst the probability of a hike in December also steepened significantly from 13.3% to 22.3% with the probability of a 50bps hike being priced for the first time at 1.1%. This trend of Fed Hike recovery is likely to continue as long as Brexit risks remain subdued, so we can expect USD to begin to price stronger in the coming days/ weeks.

4. Technically, NZDUSD trades 100pips away from a key handle at 0.73 which is a double top and may provide the ideal short area. Further, 0.73 is also the 12 month high which increases this levels probability of a price reversal. I dont see NU trading to the next level at 0.76+, however if it does trade above 0.76, I think the market has a much more hawkish view of the RBNZ than mine and have significantly de-priced Brexit risks.

5. Volatility - 1wk, 1m & 2m (-1.31, -1.35, -1.79) NZDUSD Risk Reversals all trade with a downside bias indicating put/ downside demand is higher than upside, so the option market net speculates, or is hedging for, NZDUSD to come down over the above tenors.

- NZDUSD 50 delta ATM Implied volatility is trading ABOVE realised volatility across the curve 1wk, 1m, 2m where currently IV is at 12.30% 12.49% & 13.04% vs realised at 6.97%, 13.84% & 12.20%, this difference implies > volatility is expected in the future vs now which supports selling - higher vol is generally associated with bear markets.

Trading Strategy:

1. Watch the 0.7300 level closely, if it holds place 2lot short on NU, if it fails, watch the 0.76xx level and if it holds place 3-4lot short NU - however if 0.73 falls I question the markets pricing of brexit/ RBNZ rate cut (not likely).
--- TP Levels should be at 0.70xx, 0.67xx or 0.66xx dependent on your strategy, I think all are achievable in the long-run + 6wks
---SL Levels should be STRICTLY above the resistance entry levels e.g. 20/30pips above 0.731

2. To hedge and exploit this view the best way, you combine Long USDJPY (risk-on trade) AND Short NZDUSD (risk-off trade), where imo both can be winners but this dynamic hedge could be used to pmax both possibilities.

3. Offers great risk-reward, more than 20:1 if stops are placed correctly only 20-35pips of risk but 700pips of reward potentially.
Also on the Daily NU trades well above its 60, 120 and 250 moving average + it violates its 120 and 240 day +2SD channel - these all point to aggressively overbrought conditions. Further, on the weekly NU trades above its +2SD channel on the 120wk regression channel and should find resistance at its 120wk moving average that it currently is trading towards.
Reply
akam
5 months ago
Thank you very much for your detailed analysis! It's very informative.
Reply
QuantumLogicTrading akam
5 months ago
My Pleasure sir.

Be sure to check my previous posts for more valuable information - all my posts are fundamentals!
+1 Reply
deearcodes
5 months ago
Great insights! Thanks!
Reply
QuantumLogicTrading deearcodes
5 months ago
thank you v much.

Be sure to check my previous posts for info on different assets and crosses
Reply
shomonrobie
5 months ago
Your analysis is very good and informative.
Reply
QuantumLogicTrading shomonrobie
5 months ago
thank you!
Reply
D-Rod
5 months ago
I dont believe my eyes.. u really putt that much stuff for TV. What knowledgeable stuff that is.... im looking 4ward to this playing out.
Reply
QuantumLogicTrading D-Rod
5 months ago
thanks man, you too! and me too, i think this NU could really tank!
Reply
D-Rod
5 months ago
Here's my view on NU as well..
Hitting high important resistance zone & news coming..
hope it helps
Reply
QuantumLogicTrading D-Rod
5 months ago
for sure.. what do you think about a larger TP though? i think we will go to at least 0.70, and i wont rule out 0.67 on a cut - or even lower! Especially given the way risk hasnt traded well this week, likely the start of more selling off to come!
Reply
D-Rod
5 months ago
I personally believe FOMC Meeting will be slightly bad.. if its not uplifting 1.. USD will fall. I don't take equities earnings & that into play. I don't believe in any connections with Indices except the Aud rallies from SP500.. even then I don't use that in mind. I stay straight 2 economic indicators , central banks , important chairman & metals & oil ever so rarely on a day or so basis. I personally don't think NU will fall soo much.. prob not yet.. I do believe in RBNZ doing a rate cut in 2 months for sure. The market is slow right now I believe the market is a political market & fundamentals economoc indicators won't play a role yet and / or such a big role as it used 2 for the time being . I'm looking for Central bank statements, stimulus plan, post Brexit plan & any changes in the Brexit terms.
Reply
Mr.Alias
5 months ago
you rock man ! what's that indicator that you're using?
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