AUD & NZD: Reaching for yield? - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the summer lull coupled with the continued optimism in emerging markets and China have helped to dampen volatility and that appears to be boosting the allure of core G10 currencies that on a relative basis still offer some decent yield.

Key Quotes

“That’s the case even after the RBA rate cut last week and the RBNZ rate cut expected tonight. We mention above that rate spreads as a driver of FX for many currencies have completely broken down but the very sharp decline in implied volatility may well be helping lift demand for AUD and NZD even as the RBA and the RBNZ ease. Still, even incorporating low volatility, RBNZ action tonight will leave NZD/USD vulnerable.

Again, this may well be a short-term phenomenon that will exist only during this quiet summer period. We are certainly sceptical of low volatility conditions remaining in place for long once normal trading resumes in early September. That could well prompt a liquidation of long AUD and NZD positions that have begun to emerge in these currencies according to the weekly IMM speculative positioning data.

The performance of NZD/USD has added a degree of uncertainty to the RBNZ’s rate decision this evening. The RBNZ has expressed concerns frequently in the past over the strength of the New Zealand dollar and given the gains of late there is an argument to be made that the RBNZ could be more aggressive. The 3-month OIS rate implies 35bps of easing is currently priced so the market is certainly contemplating a more aggressive cut tonight.”