'We like it': Citi makes the case for Aussie dollar strength ahead

JAIME REINA / AFP / Getty Images
  • Citibank’s Global Macro Strategy team is bullish on the Australian dollar.
  • It says RBA rate cuts are already priced in and speculative positioning in the Aussie dollar remains very short by historical standards.
  • Should the recent improvement in Chinese economic data continue, it could lead to short-covering in the Aussie dollar.
  • China will release a series of important economic reports later this week.

The Australian dollar remains on the nose with currency traders, weighed down by primarily by widespread expectations that the Reserve Bank of Australia (RBA) will cut official interest rates in the months ahead.

Speculative positioning, as measured by the US Commodity Futures Trading Commission, still remains net short by some margin, implying that traders, collectively, believe the Australian dollar will weaken further in the period ahead.

However, Citibank’s Global Macro Strategy team doesn’t share that view.

In it’s opinion, a China-led short squeeze is likely to occur in the not too distant future.

“We have seen better economic data in China recently,” said strategists at the bank, referring to the recent improvement in manufacturing and non-manufacturing PMIs for March released by the Chinese government and IHS Markit last week.

“Furthermore, it’s not just China. We have also seen better data in Korea, Taiwan, Vietnam, Thailand and even, to a lesser degree, Japan. We have been arguing that China was reflating for some time and have favoured certain market positions based on the theme mostly involving EM asset classes.”

So prior fiscal and monetary easing in China is now starting to flow through to the real economy, in Citi’s opinion, and it’s now positioning for that trend to continue, including in the Australian dollar.

It’s now long against the greenback, putting it at odds with the broader market who expect the Aussie to weaken further.

“Long AUD is non-consensus right now. CFTC positioning is close to the historical most stretched shorts and anecdotally we hear little love for the currency. Nonetheless, we like it,” strategists at the bank said.

“We remain long AUD/USD as a China reflation trade, but also because positioning is stretched short, the currency is lagging [Australia’s higher terms of trade] and has already priced in dovishness [from the RBA].”

Financial markets remain fully priced for the RBA to deliver one 25 basis point cut to Australia’s cash rate by the end of the September quarter this year, with another 25 basis point decrease almost fully priced by the middle of last year.

Citi’s bullish view on the Aussie will be put to the test this week with China set to release a swathe of important economic figures on trade, new bank lending, industrial output, retail sales and fixed asset investment in urban areas.

As opposed to the PMIs that are sentiment surveys, these measure actual economic activity, providing markets with a better indication as to just how substantial, or not, the recent improvement in the Chinese economy has been.

The AUD/USD currently trades at .7100, near the centre of the range it’s been stuck in over the past two months.

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