The RBA refrained from cutting the rates once again in April and the Aussie stood out and defied the greenback’s strength.
The team at Morgan Stanley suspects that the RBA is falling behind the curve and that the bounce is temporary. Here is their explanation:
Here is their view, courtesy of eFXnews:
Though the markets were pricing in a high probability of action, the RBA recently instead left policy on hold, despite a further collapse in iron ore prices, notes Morgan Stanley.
“We think the RBA may be falling behind the curve, and that the AUD remains overvalued, given the large decline in Australia’s terms of trade over the past few years,” MS argues.
“Furthermore, given the rebalancing currently occurring in China – with the government moving away from manufacturing/export dependence and toward a more balanced growth strategy involving domestic demand – China’s import basket is likely to continue shifting away from the industrial metals that Australia exports,” MS adds.
“With terms of trade skewed to the downside, there is likely to be further pressure on Australian corporate profitability, income, and wages too. This is likely to prompt the RBA into action later this year; we forecast another 50bps of easing, shrinking the yield differential between Australia and the rest of world – which we believe will help spur further AUD weakness,” MS projects.
In line with this view, MS targets AUD/USD at 0.69 by the end of this year.
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