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8/8/2019 MII Pitch - Naufal Sanaullah - Short EUR/NZD - October 2010
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Short EUR/NZD
Naufal Sanaullah
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Pair-specific background
` 200bps positive annual carry/rate differential
` Pro-risk proxy and inversely correlated with
VIX
` Downtrend since March 2009 and trendingbelow 200dma since May 2009
` Big mover: 52wk range > 40 big figs
` Target: 1.5500` Stop: 1.8600
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Technical studies
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Currency-specific background
Euro ()` European Central Bank
` Benchmark rate: 1.00%
` Inflation rate: 1.90%1
` M3 growth rate: 1.00%2
` GDP growth rate: 1.93%3
` Unemployment rate: 10.07%2
` Current account/GDP: -1.03%3
` Budget/GDP: -5.20% deficit3
` Debt/GDP: 82.43%3
Dollar ($)` New Zealand Reserve Bank
` Benchmark rate:3.00%
` Inflation rate: 1.50%4
` M3 growth rate: -2.00%2
` GDP growth rate:1.90%3
` Unemployment rate:6.40%3
` Current account/GDP: -3.00%3
` Budget/GDP: -4.75% deficit3
` Debt/GDP:25.36%3
1 MIPS, October 2010 | 2 September 2010 | 3 Q2 2010 | 4 CPI, September 2010 | Sources: ECB Statistical Data Warehouse & Statistics New Zealand
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Benchmark rates
Sources: ECB & NZRB
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Inflation rates
Sources: ECB & NZRB
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NZD bull thesis
` Early stage of hike cycle
` Low inflation pressures compared to other
hiking CBs, eg. India, Turkey, NJA
` AUD/NZD selling off` Unemployment low and ticking down
` Agreement with Peter Jackson regarding LOTR
(10% of tourism revenues, 1% ofGDP)
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Milk/grains ratio
` Dairy and milk are NewZealands biggest exports
` Milk ratios are commonly
correlated with NZD
pairs
` Surging food/ag prices
` With higher feed costs,
farmers respond by culling
livestock herds
` Cuts down milk supply
` Milk already undervalued
Sources: Bloomberg
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NZD technicals
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EUR bear thesis
` Greece debt worries going nowhere` Revised 15% deficit/GDP in 2009, 7% deficit/GDP in 2010
` GDP growth -4.0% in 2010, FinMin expects -2.5% to -3.0% in 2011
` Assuming 2011 deficit/GDP of 5% (conservative), debt/GDPskyrockets above 130% by end of 2011
` Recent liquidity tightening unsustainable
` German export recovery unsustainable
` Acute peripheral concerns
` Portugal
` Ireland` Spain
` QE expectations gone
` Is ECB going to be cutting rates/eventually easing in 2011-2012?
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Liquidity tightening
` Long-Term Refinancing Operation (LTRO) saw first majorroll in July, 12mo liquidity
` Very small takedown in July roll
` Led to EONIA (overnight rate) ticking up from 40bps to
above 80bps` Effectively liquidity withdrawal
` Octobers LTRO (3mo) saw major takedown, greater thanexpected
`
First LTRO to lock-in year-end funding` Sovereign spreads have not declined, liquidity tightening
not sustainable
` Federal Reserve FX swaps still being utilized
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German export recovery
` Euro started rallying fromGerman export growth
resulting from EUR/USD at
1.20
`
2000 pips higher, exportgrowth is stalling out
` MoM declines have begun,
August being the first month
` With global protectionist
trends and Euro exchange
rates so high, export
recovery looks unsustainable
Sources: German Destatis
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Periphery concerns
Sources: FX-Concepts
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Portugal, Ireland, Spain
` PIIGS is ubiquitous by now but Portugal, Ireland, & Spain haveacute risks yet to be addressed
` Russian FinMin has taken Irish & Spanish debt off of sovereignwealth fund investment list
` Irish FinMin has cut Ireland out of debt market
` Reduction of deficit from 32% ofGDP to 3% ofGDP by 2014 is thecollateral for lower yields Irish FinMin demanding from market
` 4b in debt maturing next year
` Portugal facing very harsh austerity plan that only passed when
PM threatened resignation if not passed` Spain facing massive strikes and massive structural
unemployment (20% unemployment rate, 40% youthunemployment rate)
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QE expectations
` EUR saw massive inflows since August as late, under-owned expression of QE thesis
` Fed QE headline figure underwhelmed
` S&P at significant resistance level, QE possibly discounted,
and risk factors reemerging
` Efficacy of QE? Potentially USD-bullish?
` ECB dovishness going forward room to cut & ease
unlike Fed
` Germany cant be too happy with prevailing exchange
rates
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Cross-border flows
` $2.5t in Hungarian mortgages > 5yrdenominated in other currencies,
mainly CHF
` Hungarian homeowner collective is
leveraged into massive carry trade
financed by surging Francs that
denominate their suddenly-surgingmortgages
` While the Forints they earn in and
save with are plunging on ever-
increasing economic deterioration in
their home nation (negative GDP
growth H1 2010)
` This phenomenon exists throughout
CEE (Central & Eastern Europe) bloc
` Bailout risk
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EUR technicals
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Risks
` Volatility expansion` IfUSD-driven, typically not bullish for EUR/NZD because USD
bullishness tends to hurt (and reverse a lot of recent gains in) theEuro and could send it plummeting again like in 2010
` Pair with 1:2 ratio NZD/USD short if VIX gets above 28
` New Zealand growth declines` Milk ratios still low, as well as nominal price, suggesting currency
undervalued as it is
` Early in rate hike cycle so lots of potential inflows yet to evendiscount NZRB hawkishness
` Eurozone growth climbs` How much would have to occur for further gains?
` Without Germany, can this happen?
` Can Germany grow with EUR/USD above 1.40?
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Q&A