FX Trade Recommendation: Final Call For A Long Aussie Bet‏

Although we think Q1 saw the peak in EUR/USD and we look for USD strength ahead (see our recent FX Forecast Update), it is probably still too early to call a firm dollar rebound in Q2. In the meantime, we suggest exploiting what we think might be the last chance to be long AUD for now. While we expect AUD to have a hard time on a 6-12M horizon -- not least vis-a-vis the USD -- the Aussie looks increasingly oversold after the recent drop and we expect to see a rebound in the near term.

Another RBA cut is already fully priced (and will be delivered, in our view) and the central bank will probably have to do even more in the medium term as the mining boom wears off and the non-resource sector struggles with an overvalued AUD (in PPP terms). However, importantly, we think it is early for the market to price this for a number of reasons.

First, while Chinese activity has been softer than expected, the recovery is ongoing and should sustain Australian growth and hold a hand under the prices of industrial metals, which have seen a marked underperformance (not least relative to equities) in the year so far.

Second, positioning-wise, AUD also looks increasingly attractive with longs having been unwound on a large scale during the sell-off following the RBA cut in early May, which could take part of the market by surprise.

Finally, RBA FX transactions data for April underline that the RBA is not currently opting for significant intervention to curb AUD strength, as has been seen recently in neighbouring New Zealand. RBA minutes are due for release on 21 May and should confirm that while the RBA still has scope to cut rates from here, Governor Glenn Stevens is in no hurry to cut, as past easing is currently working its way through the economy and supporting activity for now.

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