Quant Models: NY & London Sell NZD Together; Bearish AUD, CAD - BofA Merrill
New York and London sell NZD together.
This week’s variable market sentiment has weighted on equities and supported our recommendation for weaker commodity currencies. New York now joined London in selling NZD, which places Asia NZD/USD longs at risk (Chart 6). Our positioning model favors USD vs. NZD, AUD and CAD (Table 1). The fresh NZD/USD downtrend is just establishing and has further to go with MAA at 21% (Chart 7). The Residual Skew has sharply moved for NZD puts as risk reversal fell ahead of spot. In addition, Up-Down vol shows that volatility is higher when the spot goes down, showing bearish momentum in the pair placing long NZD positions at risk.
Bearish AUD and CAD.
In our view, commodity currencies are broadly expected to weaken against the US dollar. Our models paint a similar outlook for AUD and CAD. The USD became an asset in FORTE this week and further benefits from Residual skew for calls and bullish Up-Down vol against commodity FX.
