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In 1986 AUDNZD cross entered one of the greatest and easiest to navigate currency ranges of all times. 

Buying the cross (i.e. buying Australian currency vs. selling New Zealand) around 1.05 has been a particularly easy (though very slow) trade. I used to be Mr. Aussie-Kiwi, so why am I hesitating now? Why do I have no position on?

First, I want to point out something which becomes obvious with a microscope: the range actually didn’t hold this time. The cross broke to new lows, around 1.035, before bouncing back to the current level of 1.069, as i am writing this post.

Some might think of such a breakdown as ominous, some as short-lived and unconvincing. I am not a technician and I would be inclined to think the latter. 

The range doesn’t mean to me is not that there is some mysterious support level that may not be breached. Rather, I conclude that New Zealand economy is so tightly dependent on Australia that the exchange rate below 1.05 (i.e. New Zealand dollar stronger than 1.05 of Australian dollar) is just not sustainable.

What really gives me a pause that I am so suspicious of AUD and Australian economy. Why now? 

Australia has gone without a recession for a really long time (most of the time in this range, in fact). The recent back up in commodities puts pressure on the Aussie (as Australia is a producer/exporter of commodities), but by itself it does not seem worse than other back-ups during the period on the chart.

The key new risk is the same factor which I think helped Australia to levitate thus far: CHINA.

If the signs of China slowdown we are observing will develop into a full-blown recession (or a currency devaluation), what will that do to AUD?

Now could Kiwi buck an idiosyncratic collapse of Australian economy and currency? Not likely. Though I have to consider falling energy prices and lower shipping costs favoring New Zealand as a food exporter.

Do you see now how I am getting pulled in different directions?  

1. I am fundamentally bearish on AUD vs. USD, but it has already corrected so much from the highs, that I think there might be easier pickings in the long USD land.

2. AUDNZD is historically very low, but I am loath to put on any trade which would expose me to AUD.

3. I could go short NZD vs. USD directly as an enhanced version of short AUD. But I am once again running into: “This is just another long US dollar trade and I have plenty of those”. Also NZD trade has also moved quite a bit and to make things worse has negative carry.

4. I could consider a different cross to get better carry and exclude USD from the equation: MXN/NZD? TRY/NZD? BRL/NZD? I would be going into the land unnecessary complexity and idiosyncratic EM risk.

So what do I do? I think. 

My core strategy of being long dollar and long US bonds has been working its magic. When things are very good for a protracted period of time, it is wise to reduce risk. So I am not committing capital, unless I am very sure of my strategy.

Good luck.