The Reserve Bank of Australia (RBA) is optimistic about Australia’s economic outlook, at least based of public statements. As such, it thinks the next move in official interest rates is likely to be higher.
Morgan Stanley’s FX Research team disagrees, suggesting further rate cuts are “likely”.
Unsurprisingly, it is bearish on the outlook for the Australian dollar, calling it one of its “favourite shorts”.
Here’s its rationale.
The RBA kept its policy rate unchanged at its latest meeting and the statement remained optimistic on the underlying outlook. That said, AUD remains one of our favourite shorts as we see further rate cuts still likely. The rising current account deficit driven by the income balance leaves Australia dependent on foreign funding flows, posing pressure on AUD amid the recent EM-led challenging funding sentiment. In addition, with commodity prices continuing to decline and housing prices likely to fall further, we see room for AUD to weaken further and continue to recommend short AUD against GBP, USD and JPY positions.
The AUD/USD has already lost over 11% since the end of January, leaving it at 20-month lows. It’s also lost over 6% in trade-weighted terms, and now sits close to the lowest level in over two years.
Clearly, Morgan Stanley thinks those moves have further to run yet.
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