· Premise: If key correlations, albeit loose, but not likely spurious, remain intact, and we finally get a nasty correction lower in global stocks, the New Zealand dollar could get clobbered.
The chart below compares NZD/USD to the 2-year yield spread between New Zealand and the US, which has collapsed from over 5% back in 2009 to -0.94% today; plus, the green line overlay represents the Hong Kong Stock Exchange—a good proxy for emerging market equities to which NZD maintains a correlation.
Ø I suspect the yield spread favoring the US will continue to widen given the relative economic positioning between the two countries; NZ’s close ties to a slowing China is a concern.
Ø Sooner or later, we will finally get a real correction in stocks. I suspect such a correction will be accompanied by a risk-bid into the US dollar, creating more pressure on emerging markets; that in turn will likely be reflected in a big sell-off in Hong Kong equities.
Thus, the New Zealand dollar appears particularly vulnerable once this minor correction higher is complete.
We want to get short Kiwi once this US dollar correction is over.
If we get another leg up in the dollar, as I suspect, the New Zealand dollar could easily its post credit crunch low made in early 2009, at around 48 cents. Stay tuned.
