Trade view /
09 June 2016 at 8:37 GMT
The Reserve Bank of New Zealand failed to cut rates at its most recent meeting, a cut that was expected by a large majority of analysts. The NZD squeezed violently higher on the news, likely mostly as a function of short-term market positioning and weak USD longs after the recent bad US economic data, rather than anything in the new RBNZ guidance.
That guidance remains very dovish and clearly indicative of further interest rate cuts in the pipeline. With global bond markets marching higher and higher and yield curves flattening, the risks are growing and economic slowdown fears spreading, which could provide strong headwinds for riskier assets and less liquid currencies like the kiwi.
In addition, the kiwi strength itself increases the odds of a more aggressive message on currency weakening from the RBNZ, which already clearly disapproves of the current level. We generally prefer to trade in options as this trade goes against the current market direction and because the UK referendum risks extreme volatility in coming weeks that could spread across asset classes.
Ongoing USD weakness on fresh, weak US data and strength in risky asset prices are the chief risks to this trade.
Source: Saxo Bank. Create your own charts with SaxoTrader click here to learn more
— Edited by Clare MacCarthy
Non-independent investment research disclaimer applies. Read more