RBNZ USD AUD and CAD

February 21, 2023

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RBNZ USD AUD and CAD

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Stocks are droopy as the new year short squeeze and seller’s strike have come to a close and the standard new year bull seasonal ended last week. Now, you have reduced demand from 401k and bonus flows, bearish seasonality into mid-March and a smaller short base to reckon with… Just as pressure from yields picks up once again.

On the other side of the ledger, this 3.90% area in US 10-year yields provides major resistance for yields (see Friday’s am/FX), fixed income volatility is not yet scary, and The Economist is talking about persistent inflation (a contrary signal that screams disinflation).

Also, UK PMIs are looking healthier, oil prices are steady at lower levels, and copper looks confident even as overall China reopening excitement dwindles. Here is AUDUSD vs. copper and gold, to give you a sense of just how strong copper looks like right now.

AUDUSD, copper, and gold, hourly back to early November 2022

So, while I am still bearish stocks as outlined in am/FX on 16FEB, I think the real downside acceleration will only begin when US yields are firmly through 3.90%. Given we’re right there, we could get the next leg down in equities pretty soon. If you’re looking for catalysts, the prime candidates would be FOMC Minutes (tomorrow at 2 pm NY), Williams on Inflation (5:30 pm NY tomorrow), Ueda Thursday night, or Core PCE Friday.

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RBNZ

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Tonight, we get a hotly-anticipated RBNZ decision. It has been 91 days since the last meeting and so much has changed. They were expected to go 75bps for a while, but recent data has softened and now the expectation is a hike of 50bps. There are whispers of something smaller as the damage from Cyclone Gabrielle mounts and that damage could be on par with the Christchurch earthquake.

Recall that the RBNZ cut rates 50bps at the March 9, 2011 meeting, despite expectations that were evenly split between three possible outcomes: Cut 50, Cut 25, or no cut. At the time, there was confusion over whether the RBNZ would focus on the growth hit (cut 50), or the inflationary aspects of the rebuild and supply chain hit (rates unchanged). In the end, they cut 50, even though they had just started hiking shortly beforehand. This chart shows how the situation unfolded at the time.

RBNZ Overnight Cash Rate vs. NZ YoY CPI

You can see how inflation (the red line) spiked after the earthquake but the subsequent rebuild was not inflationary as global secular stagnation dominated the inflation story in all the major economies.

I do not have a hugely out-of-consensus view but I do think the distribution is way too tight with 20 economists calling for 50bps, two for 75bps, and just one for 25bps. The dovish tail is big. This is a central bank meeting where almost anything is possible. Inflation is high, housing is tumbling, jobs market is softening, confidence is low, there is a natural disaster in the mix, the PM is resigning… The RBNZ could justify anything from no hike to 75bps quite easily. Especially as they have already hiked so aggressively. Make sure you’re logged in at 8 pm NY tonight.

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Final Thoughts

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Peso 1, Donnelly 0. The long USDMXN trade stopped out on Friday. It was an attempt to catch a falling piano and the piano was not caught. The pair is through the supports and obviously my timing and/or my read on positioning was off. I will forget that idea and move on, although I will remain on high alert because the lovefest for Mexican fundamentals right now feels a lot like the lovefest for NOK fundamentals in March 2017. Yes, MXN fundamentals are great, but it’s at the point of peak fundamental euphoria that the story is riskiest for latecomers.

My long USDCAD remains a decent trade and if we take out 1.3540, I’m going to get super excited. See chart below. That triangle has been coiling for five months and should produce a ton of energy on a breakout.

It’s not every week you get smoked on a long USDMXN idea and your long USDCAD pays for it—this shows the continuing divergence between G10 and EM and how real rates in Mexico attract inflows even as US equities sag.

My main views for now: Path of least resistance is higher yields, lower stocks, and stronger USD—a clean break of 3.90% in US 10-year yields should trigger acceleration. RBNZ is worth watching closely tonight.

And stay away from AUD shorts with copper trading so well. Finally, don’t forget about Ueda this week.

Have a meditative day.

good luck ⇅ be nimble

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“No writing on the solitary, meditative dimensions of life can say anything that has not already been said better by the wind in the pine trees.”

Thomas Merton, Thoughts in Solitude (1956)

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