The Morgan Stanley FX Strategy team has sensed a change in markets as we head toward next week’s FOMC meeting and it’s the Aussie dollar’s recent performance which has catalysed their thinking.
Ian Stannard, Morgan Stanley’s head of European FX Strategy wrote overnight that “the AUD has rebounded, rather than come under pressure despite growth concerns and asset market volatility in China,” a sign there is a chance the US dollar’s recent strength reverses and euro, yen, GBP and Aussie all benefit into year’s end.
“We have highlighted potential for a risk reduction-induced correction in currency markets going into year-end. As year-end approaches, there is still several risk events on the horizon, suggesting risk reduction could become a larger theme. Extreme positioning and flow dynamics also point to larger year-end moves than seen for several years,” Stannard wrote.
Longer term the downtrend remains intact but the Aussie’s price action of the past two days supports Stannard’s view. As a result, the Aussie’s recent low at 0.8220 might be it for the moment and it could even rally toward Christmas.