It’s no secret that the Australian Dollar has been on the slide in 2018. From highs above 0.8000 on the Forex Spot Market, the AUD currently sits at the 0.7280 range and thats only after a recent rally in November bouncing from lows of 0.7200 only a few weeks earlier.
The Reserve Bank of Australia (RBA) has remained optimistic about Australia’s overall 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”.
So it’s safe to say well, what the hell happened to the AUD in 2018? Why has it dropped almost a full 10c and starting to act out like an emerging economy?
Here’s Morgan Stanley’s explanation:
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.
As we opened with, if we look at the most traded Aussy pair the AUD/USD we can see it has already lost over 11% of its gains 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.