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Analysts at Morgan Stanley are out with their take on the Aussie dollar and offer a trading recommendation, in response to the recent neutral shift by the Reserve Bank of Australia (RBA).

Key Quotes:

“RBA moving towards rate neutrality has been a game-changer for AUD.

We see evidence that AUD is increasingly used as a funding currency.

Australian economic conditions have deteriorated.

High household debt reduces workers’ appetite to aggressively demand higher wages. This low-inflation dynamic may intensify as real estate prices have started to fall, reducing net household wealth.

We recommend selling AUDJPY.

The risk to this trade is central banks globally turning dovish as global growth moderates but develops a synchronized pattern. In this case, Japan may continue shifting funds abroad and Australia may find it easy to attract equity inflows.

Nonetheless, we regard the probability of such an outcome as minimal. In the absence of rising factor productivity growth, accelerating G-10 wage inflation either suggests higher inflation or lower corporate profits, not boding well for the global risk outlook.”