Our recommendation to buy AUD/NZD spot (at 1.0650) from earlier this week (see FX Trade Recommendation: Long AUD/NZD on positioning and RBNZ pricing, 20 January 2014) has been stopped out this morning at 1.0500 for a 1.41% loss.
While the spot has moved higher again, we recommend staying sidelined on currencies exposed to the ongoing emerging market sell-off. Indeed, a series of local events in Argentina, Turkey, Thailand and Ukraine topped by a disappointing Chinese PMI earlier in the week has revived more widespread EM worries (see Flash Comment EM: Storm turns into hurricane - EM sell-off escalates, 23 January 2014). Notably, AUD has been particularly hit hard due to its general EM exposure and to the related sell-off in base metals (see Commodities Update: China slows again - bad news for base metals, 24 January 2014). RBA comments on the strong AUD overnight did not help either. On NZD, we maintain the view that too much is priced in on RBNZ in terms of rate hikes but we acknowledge the (minor) risk of a hike already at next week’s meeting after the upside CPI surprise.
So far, the reaction to the EM sell-off has not been particularly USD positive, which is to be expected. However, the traditional safe havens such as JPY and CHF have gained. This suggests that markets, to a certain extent, may be pricing in the chance of a Fed reaction (more easing) should global growth end up taking a hit from a wider EM crisis. In contrast, an ECB reaction should possibly not be expected in such a scenario.
Our current open trade recommendations can be seen on page 2; in addition, eight of our ten trades from FX Top Trades 2014 remain open.
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