Westpac sees the Dollar Index lower and has two other trade ideas
Westpac is looking for another leg lower in the US dollar and suggests selling the Dollar Index on a break of 99.40.
The bank highlights 99.40 as key support over the past two months and would sell a downside break, targeting 98.00 with a stop at 99.90. Westpac said a benign July CPI report along with convincing steps towards reopening the Strait could provide the catalyst but we haven’t seen that this week.
The important point is that this isn’t a live short yet. They’re waiting for the technical break rather than trying to front-run it.
Elsewhere, Westpac is sticking with its long GBP basket, a trade it entered on July 10 on the idea that the UK’s “governability risk premium" could compress. The basket is long sterling against the US dollar, euro, Swiss franc and Swedish krona, with the largest weighting against EUR. The target is 105 from a 100 entry, with a stop at 98.
That’s an interesting way to frame the sterling trade because it’s less about a booming UK economy and more about removing a political discount that had been embedded in the currency.
Westpac is also watching AUD/NZD closely around 1.2000. Attempts to break lower in both July and August failed and the latest move higher has been helped by the RBA’s hawkish stance. Momentum now points towards 1.2100-1.2200 and Westpac says that could be worth a tactical long.
However, the larger bias remains to sell a convincing downside break in AUD/NZD. For that to happen, Westpac says Australian-New Zealand yield spreads will probably need to extend the declining trend that’s been in place for six months.
There isn’t much on the immediate NZ calendar ahead of the September 2 RBNZ decision, while Australia has July employment next week and CPI the following week.
So the three takeaways from Westpac are fairly clean:
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Sell DXY below 99.40, targeting 98.00
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Stay long GBP against a regional basket
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AUD/NZD could squeeze to 1.2100-1.2200, even though Westpac ultimately still likes the idea of selling a convincing break lower
The DXY trade is the one that stands out. A break of 99.40 would put the dollar back through an area that’s repeatedly held over the past couple of months and, if the fundamental backdrop cooperates, there’s not much in Westpac’s way before 98.00.
This article was written by Adam Button at investinglive.com.