The very near-term risk of eurozone governments failing to commit to faster fiscal consolidation and the ECB failing to commit to larger bond purchases points to downside risks for the high-beta AUD and NZD, following the recent rally. But we remain constructive over the medium term for the following reasons:
° We expect the ECB to eventually commit to more sizeable eurozone bond purchases, likely alongside IMF/EFSF support;
° The European debt crisis and associated deterioration in eurozone growth has so far only had only a limited negative impact on macro fundamentals in Australia and New Zealand;
° Australia and New Zealand have negligible direct exposure to peripheral eurozone bank claims and low direct trade exposure to the eurozone;
° Monetary policy easing in China, following the 50bp reserve requirement ratio (RRR) cut on 30 November, should support Chinese growth and commodity prices;
° US growth has held up, but a slowdown in H1 2012 could trigger a third round of quantitative easing, which would see liquidity flow to strong EM sovereigns and commodity currencies;
° The stability in local-currency commodity prices, helped by weaker currencies, is insulating exporter incomes;
° Australian and New Zealand banks have limited reliance on offshore funding markets.
We expect the NZD to outperform the AUD over the next three months as interest rate differentials narrow, regardless of whether the RBA cuts or keeps rates unchanged at its policy meeting on 6 December. As such, we recommend buying a 1-month AUD/NZD put (strike: 1.28); ref 1m fwd: 1.3107, 1m implied volatility: 8.07%. The structure costs 26bp and yields a maximum payout at expiry of 5:1 if our 1m forecast of 1.26 proves correct. The maximum loss is limited to the upfront premium.
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BARCLAYS CAPITAL
FOREIGN EXCHANGE RESEARCH