Treasure Chest | Jan 30 2013
By Greg Peel
The Aussie dollar, that is the AUDUSD, has been undergoing a long period of relative stability despite a weaker outlook for the Australian economy and rate cuts from the RBA to address that weakness. The currency simply refuses to go down, with earlier falls in commodity prices making no difference as a combination of "safe haven" investment from offshore in AAA-rated government bonds along with the ongoing flow of offshore spending into Australia's major gas and other commodity projects conspire to maintain Aussie strength. While the terms of trade for both the Aussie and the Kiwi dollar remain at historically high levels, Deutsche Bank strategists appreciate a reluctance from traders to go long the AUDUSD or NZDUSD at levels which belie supposed valuation.
However, the strategists also continue to expect both the Aussie and Kiwi to be supported by extremely easy monetary policy in major economies which will in turn foster global economic improvement. Throw in the positive influence on the Aussie of a recovering China and a positive influence on the Kiwi from a recovering local housing market and Deutsche Bank's trading preference is to be long both. However, the US dollar is not the preferred exchange currency due to perceptions of overvaluation.
The yen is not an option either given it has already run very hard against the Aussie/Kiwi on a fresh approach to Japanese monetary policy. The euro has also rallied, but largely on short covering, Deutsche notes. (Nothing much happened in Europe in Q4 or since so those trying to punt the next euro-disaster have had to bail out). But the rally in the euro appears to the strategists to have run its course as the last of the speculative positions closes out. To that end, they see the potential for the euro to fall against an Aussie and Kiwi, which are otherwise supported.
Hence to go long the Aussie and Kiwi, Deutsche recommends shorting the EURAUD and EURNZD. At the time of writing the former is trading at 1.2890 and the strategists are looking for a move down to 1.2450, and the latter is trading at 1.6090 and they see a move to 1.5600.
Deutsche recommends traders set their stop-losses at 1.3050 and 1.6300 respectively.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
