J.P.Morgan Recommend Entering Shorts

J.P.Morgan note that "expectations for monetary policy in the antipodeans have turned considerably more hawkish in the past month, particularly in New Zealand where OIS markets now price a ~80% chance of a rate hike by November 2021. The market's reaction to the RBA's shift earlier this week has been rightfully less extreme, resulting in an even wider NZ-AU 12mx1m OIS spread. November 2021 is clearly early to be moving vs the rest of DM, but the repricing in NZD has nevertheless propagated further out too, meaning that not only are rate hikes being priced sooner, but expectations for the terminal rate (2Yx1Y for example) have not suffered. Given the RBA has retained the 10bp yield cap on the Apr '24 ACGB and has outlined clear macro-parameters for hiking (i.e. inflation sustainably between 2%-3% for "a number of quarters"), there are relatively more constraints for markets to price RBA rate hikes on quite the same timeline as the RBNZ."

• "Despite these moves in front-end rates, the spillover to AUD/NZD has been muted, with the cross one standard deviation rich relative to market-based cash rate expectations. A lower AUD/NZD is consistent with our current FX forecasts which had already implied further depreciation in the cross, targeting NZ$1.04 at year-end. AUD/NZD depreciation would also fit within our broadly bullish USD view, given the negative correlation exhibited vs. the broad dollar, and also sidesteps existential questions on global yield curves, as the cross has historically shown little correlation with U.S. term rates."
• This has led them to recommending a short AUD/NZD position in cash at NZ$1.0700 (stop-loss: NZ$1.0850, target NZ$1.0400).