Two spots to sell the Australian dollar
From Deutsche Bank:
Bond inflows to Australia are likely to fall off a cliff even before the RBA cuts rates toward 1%. A possible Labor win in July could dampen house price inflation. Externally, commodity prices and global risk should deteriorate as China slows.
Admittedly, AUD has lost many supporters lately, but positioning remains net long on IMM and neutral on Corax. Valuation is supportive, too, with AUD the most overvalued currency after HKD (chart 6). Since valuation has lately become a dominant driver of currency performance, this is likely to weigh on the lifestyle. Overall, therefore, we think entry levels are still attractive. The market has failed to fully price the magnitude of the currency adjustment Australia needs.
We like selling the Aussie against G3 equally weighted to avoid undue exposure to an uncertain dollar/Fed outlook on the one hand and the TWI's exposure to a peaky Asian EM complex on the other. We also like this narrow basket because, compared to AUD/USD, it has greater positive betas to Australia's idiosyncratic terms of trade and rates, as well as to global risk sentiment. The grass is greener on the other side
We also see relative value in selling AUD/NZD. While kiwi valuation and positioning are similar to the Aussie, we expect macro trends to divergence over the next months. For one, the RBNZ is more on top of the curve since the March cut, and the inflation pulse could improve notably in the second half of the year. Regardless of RBA easing, therefore, we don't expect the OCR to fall below 2% this year, and the likely cut to 2% in June is already half discounted by the market. Moreover, while New Zealand's terms of trade should also suffer from slowing Chinese credit growth and a stronger dollar, the dairy sector now looks fundamentally stronger than iron ore in particular. European producers are rapidly exiting the market as their feed costs soar along with global grain prices.
As monetary policy and the terms of trade move in the kiwi's favour, parity could soon come into sight again.
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