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Analysts at Morgan Stanley recommend going on short on AUD/JPY, as they maintain a bearish view on the Australian dollar amid weakening domestic economy.

Key Quotes:

“Weak GDP print “¦ housing- exposed sectors were a key point of weakness.

Could be a sign that household deleveraging is beginning.

This stands in contrast to RBA Governor Lowe’s comments that the adjustment in the housing market is manageable for the overall economy and unlikely to derail economic expansion.  

While acknowledging that the housing weakness negatively impacts consumption, he emphasized that this should be counteracted by the wage increase expected with the tight labor market.

However, labor costs and wages have been lackluster and there is little evidence to show a sustainable rebound that would be sufficient to support financial net worth and negate the wealth effect drag on the real economy.

Crucial to monitor is the performance of the Australia equity market.

Currently, the stabilization in global and Australian equities has allowed Australia households’ net worth to be partially sheltered from the impact of rapidly falling housing prices.  

Should both housing and financial assets turn, this could accelerate the negative wealth effect and seriously chip into consumption.  

As such, we remain bearish on AUD and short AUDJPY.”