Friday, 6 February 2009

NZD Update, maybe a "freeze" trade looming?

After much debate with myself, I have left both the long position (NZD2m @0.5668) and the short position (NZD4m @0.5150) in place, still net short NZD2m.

Given the back pedaling from the ratings agencies this week, all is not as it seems. I suspect the government has been active behind the scenes, looking to stop a possible downgrade. It was the threat of a downgrade that caused the NZD/USD to drop from 0.6000 to 0.5300 in the first place. Then cutting interest rates by 1.5% pushed the NZD even lower to 0.5000.

If the NZD/USD develops a range between 0.5000 and 0.6000 in the weeks ahead there may be opportunities both sides of the trade.

So I may buy back NZD2m in the low 0.5000 area and move to net square then trade both sides from there.

Not sure yet, but leaving both trades open gives me some options........


walter said...

KT, tell me if my thinking is too simplistic. Sell USD/Buy Renmibi because the Chinese will tire of buying US Treasuries that drop in price as money printing/borrowing grow in USA. They will also realize the wisdom of spending their hard earned export money/reserves on their own people in the form of domestic investment/consumption rather than USD investment. Plus, a stronger Yuan will reduce risk of inflation. I believe, many reasons to buy Renmibi in expectation of cataclysmic failure of USD and relatively stronger financial position of reserve heavy, debt-free china.

Kiwi Trader said...

Hi Walter

There is a growing risk of competitive devaluation looming. This is where currencies are allowed to weaken by their monetary authorities to help their export sector.

Big trading nations may begin to favour this. Just look at the comments on the GBP and the UK from the Europeans. Interestingly the US does not really care about the value of the USD. They use weasel words about strong USD but really as external trade is such a small part of the US economy, they don't sincerely care about the value of the USD.

The Chinese favour a weaker Yuan and there are rumours swirling that they may weaken the Yuan deliberately to help their exports restart.

The USD/weak/printing money/inflation argument you outline is perfectly valid.
But the market is not looking at that at all at this stage.

It may be next years story, but as yet, not a market moving factor.

Besides, the USD continues to strengthen against nearly everything, as funds still are going for the safety of the USD.

Maddening I know, but market sentiment is like that...see some of my earlier posts on the lack of logic in financial markets!!