SocGen: Go Long AUD/NZD 1-month NZ$1.08 Calls

Societe Generale note that “AUD/NZD has dropped by 7% since the beginning of October primarily due to widening Interest rate differentials between the two currencies given RBA’s dovish shift in October & lingering Uncertainties in China’s Zero Covid policy.”

• “The RBA left the door open for more rate hikes to bring back domestic inflation to target levels. Positive developments around an exit from Zero Covid policy and housing rescue have lifted sentiment in China.”
• “The AUD would stand to benefit if there is a sustained improvement in conditions in China by virtue of being its largest export partner.”
• “On the other hand, the RBNZ projects that the NZ economy could start contracting as soon as Q223. While the RBNZ still maintains a hawkish bias, their resolve may be tested by domestic growth concerns.”
• “From a technical perspective, the AUD/NZD is in oversold territory.”
• “AUD/NZD term structure shows 1-month implied vol. notching a sharp dip compared to the rest of the tenors. This is likely due to investors expecting event risk to be diminished after FOMC until the end of the year. “
• “Having looked at various ways to cheapen a topside expression in AUD/NZD, the vanilla implementation seems to be the most sensible approach currently.”
• They recommend going long AUD/NZD 1-month NZ$1.08 calls at 0.225 %, forward reference NZ$1.06, vol. reference 7.21%.