Kiwis Don’t Fly – neither will their dollars

New Zealand had its elections this past weekend and the provisional results leave the fate of the next government squarely in the hands of Mr. Winston Peters, the founder of New Zealand First (sound Trump-esque familiar???) party, the Kingmaker. Mr. Peters has worked with both the National Party and the Labour Party in the past but his policies seem better aligned with that of the Labour Party’s at the moment.

Labour party wants to expand RBNZ’s mandate to include a focus on employment and NZ-First wants to go one step further and expand it to also include currency management. Labour wants to slash immigration by 20,000-30,000 annually and NZ-First’s Mr. Peters, who has a long standing anti-immigration stance, wants to slash migration to 10,000 a year – a drop of more than 60,000 annually!

If a marriage between NZ-First and Labour materializes, we fear that the New Zealand economy, which has grown tremendously on the back of rising immigration, will take a hit. As a result, RBNZ’s monetary policy will likely take a stimulatory tilt. Add in an expanded mandate for the central bank and this will be a perfect recipe for prolonged NZD weakness.

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Bluffers Always Raise – to call or to fold

This post is an update on our previous one where we hypothesized that Bank of Canada’s (BOC) first rate hike was a mistake and that if crude oil prices continue to fall then the BOC would have to retrace its steps. Since then, we have had another BOC meeting and to our surprise they hiked again. Judging by the market’s reaction, this came as a huge surprise and the Canadian dollar (CAD) rallied close to 200 points against almost every currency. We remain short CAD but we are getting cautious about our presumed catalyst.

Indicators we watch are painting an oversold crude oil market but price action, so far, is muted. Nonetheless, we remain cautious on our bearish outlook for crude oil. We will watch the tape and let prices dictate our conviction. If crude oil prices make a sustained break above current levels around $50 we will lose conviction on our short bias until prices get back above $61. In that event, we will look to exit our short CAD trades with the intention of re-entering when WTI crude oil prices get to $61/barrel.

Please click here to read the article.