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Analysts at Morgan Stanley offer various scenarios for trading the AUD/USD pair, in relevance to the upcoming Xi – Trump meeting this weekend.

Key Quotes:

“Trading a pause in escalation:

The ongoing trade tensions have been one of the main drivers of AUD weakness this year. If we extract current trade tensions and assess AUDUSD valuations by using traditional fundamental variables (commodities, rate expectations, spot rate differentials and inflation differentials),  our model suggests AUDUSD is marginally below the current fair value of 0.7524. Should a positive outcome emerge from this Saturday’s meeting between Presidents Trump and Xi, AUDUSD could gravitate towards this level.  

Street estimates are converging towards a consensus of near-term stabilization, also supporting a tactical AUD rebound.  In the medium to long-term, we remain bearish on AUD for reasons relating to household debt, current account deficits and wide rates differentials against the US.

Trading a less happy outcome:

AUD may be vulnerable in this scenario.

AUD sentiment has recovered in recent weeks from contrarian low levels and a recent uptick in data (like the recent employment report) offers more attractive selling levels.

To this end, investors looking to position for a less benign trade outcome might prefer AUD shorts, particularly against safe-haven currencies like JPY.”