Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 15 July 2016 at 14:30 GMT

FX 4 Next Week: Is the market preparing to swing NZD low?

Head of FX Strategy / Saxo Bank
  • Market reassessing recent kiwi strength
  • Aussie likely to make gains against its neighbour
  • ECB meeting could boost EURUSD volatility
  • Sterling's first rebound could come against CHF

New Zealand dollar
Is the NZD about to lose its footing? Photo: iStock

By John J Hardy

This week has mostly been about sterling finding its feet as a new UK government takes the helm, as well as JPY tumbling from recent strength on an unwinding of the Brexit shock and a focus on the prospects for helicopter money. 

Next week, we’re unsure how long these countertrend moves have to run and generally focus our attention elsewhere, save for a longer-term GBPCHF option idea.

NZDUSD downside

This week, the kiwi is one of our focus currencies as we are seeing strong signals that the market is reassessing the foundation of its recent strength – see more in the AUDNZD long idea below, as next week is a key one with a Q2 NZ CPI announcement on Tuesday and then an Reserve Bank of New Zealand event risk on Friday. 

As for the US dollar, the strong batch of data to end the week are helping to confirm technical signs of a recent top in NZDUSD (divergent momentum) and we look for follow-through lower next week, with Friday’s strong US Retail Sales and Core CPI releases possibly bolstering USD sentiment next week as well. 

Trading stance: Bears will want the recent 0.7300 area to stay unchallenged next week and will be looking for an eventual test through the 0.7000 pivot area for a more profound selloff that could eventually go on to test the lows for the cycle in the months ahead.

AUDNZD longs

We discussed long-dated AUDNZD call option strategies with a strike price of 1.0600 last week, an idea that is already in the money as AUDNZD exploded off its recent base after the RBNZ announced an “economic assessment” for next Friday. The assessment, of course, is likely to send a policy message or two to talk the NZD down and issue dovish guidance after the kiwi’s strong Q2 performance that is likely impacting inflation negatively (note Tuesday's NZ Q2 CPI release). 

Meanwhile for AUD, the global stimulus theme driven by UK and Japanese central bank and eventual fiscal expectations (and with next week’s ECB as a wildcard) could leave the AUD as a general outperformer against weaker currencies next week.

Trading stance: AUDNZD bulls will buy into weakness for a try toward 1.0950 in the weeks ahead.

EURUSD flexibility, contingent on daily/weekly close

This is a carryover from last week as we never got a signal for EURUSD to break out of the current tight range and something needs to give as we await a directional resolution soon. We generally prefer the downside, but the inability of the greenback to get something going against European currencies this week has somewhat lowered conviction for the near term. 

Beware the European Central Bank meeting on Thursday. Although the market is expecting little from the ECB, traders must respect that meeting days have at times offered extraordinary intraday volatility. 

Trading stance: EURUSD traders will look for either a 1.1200 break to trigger further upside potential above. 1.1300, or for a break below 1.1000 to signal a run to the 1.0800 area next.

Long-dated GBPCHF upside options

The Bank of England erred on the side of caution this week in not moving to cut rates, and there is some chance that it will not cut rates at coming meetings, choosing instead to opt for targeted quantitative easing. 

In any case, the financial system is central to the UK economy and rate cuts aren’t doing banks any favours. At the same time, some kind of solution may be forthcoming for Europe’s banking system even if the rhetoric hasn’t looked promising recently, and the Swiss franc achieved far less premium in recent weeks than one would have expected given Brexit and the troubled Italian banks. 

The market may be set to change its mind on the sterling’s prospects over the next couple of months.

Trading stance: This is a trading theme for patient traders looking far ahead in the coming weeks. Over that time frame, traders looking for an eventual sterling rally may look to establish call spreads or outright call options far out of the money to the upside, and scaling into the position on dips in the action back toward the post-Brexit lows. Examples are 1.3600 or higher calls, orr call spreads that offer 2.5-to-1 (or better) payouts relative to the premium risked.

St. Paul's Cathedral, London
The Brexit vote was no bed of roses for the GBP, but given a few months 
we may see sterling in bloom again. Photo: iStock

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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