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Rough Seas Ahead in the South Pacific

Thursday, 9 Feb 2012 | 11:36 AM ET

These strategists say the Australian and New Zealand dollars could be headed for a fall.

Between improving risk appetite and high yields, the Australian and New Zealand dollars have been on a roll. But the strategists at HSBC think the party's running a little late.

"Both currencies have significant downside risks based not only on their extreme valuation, but also on their balance of payments dynamics, poor risk/reward compared with some G10 alternatives, and their declining role as a China proxy" now that options for trading on China directly are expanding, they wrote in a note to clients. In short, you can't just trade the Aussie and kiwi like high-yielding commodity currencies.

The two have different vulnerabilities, the strategists say. The Aussie is significantly more overvalued by several standard measures. But New Zealand's balance of payments is less attractive, and while investors seem to have factored in a potential rate cut in Australia, but they haven't done so with the kiwi.

Adding it all up, the strategists say the kiwi is at greater risk of a fall - but the Aussie isn't looking a whole lot better.

Be careful down there.

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