Australia's current account deficit position makes AUD vulnerable to global rates and risk sentiment
Morgan Stanley is out with a Global FX strategy that is bearish on the AUD.
They cite concerns about building approvals which fell at their fastest pace since Lehman crisis in 2008 (-12.6% month on month and -24.9% year on year). Their economists expect the Australian housing market to slow in 2017, prompting the RBA to cut rates. Meanwhile the market is not pricing in a cut in fact in 2017, the market has priced in a seven basis point hike (see chart below). They argue that this needs to be priced out and when it does, the AUD will fall.
They like two trades to take advantage of this projection:
- Sell AUDNZD
- Sell AUDCAD
Here is what they say for both those trades.
AUDNZD - China slowing demand for iron ore/Increased demand for dairy.
For a trade into year-end we suggest selling AUDNZD driven by terms of trade differentials.
in general, when analyzing commodity currencies it's hard to stay away from monitoring data from China. Yesterday we learned that the Chinese authorities were going to restrict mortgage lending further by raising deposit requirements. With the aim of reducing the bubble in the housing market and combined with already announced measures that limit borrowing from construction companies, there is now a risk of slowdown in China's iron ore and steel requirements. That sets AUD of for another bout of weakness as iron ore prices have again failed to surpass $80. In contrast, the Chinese demand for dairy products continues to boom, helping whole milk powder prices rise 15% November.. The upcoming Fonterra auctions are expected to be strong a reduced supply after the New Zealand earthquakes. Sell AUDNZD
AUDCAD - US growth spillover
The second trade, which could work for the whole of 2017, which plays on the growth potential differential between the US and China, is to sell AUDCAD.
We don't expect the bank Canada to cut rates in 2017 as inflation and growth have stabilized. In fact the economy may even see support from fiscal stimulus in the US. The bar for the Bank of Canada easing appears very low now as a Bank of Canada's own fourth-quarter GDP forecast has been revised down to 1.5% and Gov. Poloz said recently that an oil price shock will be required to depart from its current outlook (which we interpreted as oil prices heading back to and staying in the $30 handle).
MS maintains a short AUDNZD in its strategic portfolio and promotes selling AUDCAD in is top 10 trades for 2017.
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