From a Friday MS note a snippet on the Australian dollar.
The bank look at correlations and mention:
- AUD - its correlation to US rates turned meaningfully positive and its correlation to risk, already positive, strengthened further. The macro environment in which risk appetite weakens further and the Fed's balance sheet normalization ends faster than expected, in turn likely leading to lower yields, bodes poorly for AUD.
- This is particularly true when factoring in a worsening domestic outlook as well. While CPI printed above expectations, business confidence continues to soften and the continued domestic tightening from slowing credit growth and a weakening housing market should continue to take their toll.
I can't take issue with them on domestic AUD conditions but globally … we've just seen the Fed take a strong u-turn to dovish, the ECB is barely anything but dovish, Japan ain't gonna sway from ultra-loose policy any time soon and the Bank of England is hamstrung on what it can do due to approaching Brexit … while these all stay unhawkish, and thus not a weak macro environment (from a rates perspective) for risk, that's gotta be a relief factor for the AUD?
