Morgan Stanley reckons the Aussie dollar selloff is just getting started

JUSTIN TALLIS / AFP / Getty Images
  • The Australian dollar has been slammed over the past three sessions, losing 2.7% against the greenback.
  • Morgan Stanley’s FX strategy team reckons there’s further downside to come.
  • It doesn’t expect the Aussie dollar will get much support from today’s Australian inflation report.

The Australian dollar has been slammed over the past three sessions, losing 2.7% against the greenback.

At .7605, the AUD/USD currently sits at the lowest level since mid-December.

Morgan Stanley’s FX Strategy team thinks there’s plenty of downside yet to come.

“With markets focused on inflation concerns, currencies of areas with high debt levels and are dependent on foreign funding like AUD should come under selling pressure in particular,” the bank said in a note released on Monday.

“Domestic data continue to be lacklustre, most recently evidenced in the recent employment report, which should keep the RBA on hold until next year and limit AUD upside pressure.”

Adding to downside risks, Morgan Stanley doesn’t expect today’s Australian inflation report will provide the Aussie with much support.

“While our economists expect the headline CPI release this week to come in slightly higher than market expectations, they see underlying inflation as remaining subdued, suggesting little change to the RBA outlook. We also note that inflation in most places globally has disappointed market expectations,” it says.

Underlying inflation, or core inflation, is expected to lift by 0.5% for the quarter, leaving the change on a year earlier at 1.85%.

Such an outcome, should it prevail, would mark the 10th consecutive inflation report where annual underlying inflation has remained below the RBA’s 2-3% target.

And while Morgan Stanley remains downbeat on the Aussie’s prospects at present, it thinks US dollar strength will continue for some time yet, an outcome it says should see the AUD/USD come under further selling pressure.

“The USD should stay in a relatively outperforming position as US corporate earnings remain strong and inflation concerns may continue to help the US yield curve steepen,” it says.

“We like to sell AUD/USD at market with a target of 0.7160 and stop of 0.7820.

“The risk to this trade is a strong rally in risk appetite.”

AUD/USD Daily Chart

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