The case for shorting the Australian dollar

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I gave you the bulls this morning, whose arguments looked dubious. Here is the bear case for the Australian dollar from Society Generale:

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It seems odd, given that every economist of note accepts that globalisation and technology have changed the way labour markets work so much in recent years, that no-one has really changed their models of how unemployment, wages and inflation interact. Simply re-stating historic relationships with religious fervour doesn’t strike me as sensible. But, that having been said, chart 1 seems a fair place to start when suggesting that the odds favour a further pickup in US wage growth in the months ahead. I don’t think you can take old relationships for granted but wages react to unemployment with a lag, and we’re on a path towards faster wage growth. The bad news? The correlation between hourly wages and the core PCE deflator is terrible (glance in the margin). The bottom line, is that I’m a lot more confident that lower unemployment will deliver faster wage growth in the months ahead, than I am about any unemployment/inflation relationship. I want to position for faster wage growth, by shorting the front end of the US curve in anticipation of a less dovish tone to Fed-speak in the autumn.

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…2-year US swap rates have risen by 30bp since the end of November, the low point of the fall back from last summer’s taper-spike. Over the 7 months since then, the biggest major FX movers have reacted to interest rate moves so that at the top of the FX rankings are the New Zealand dollar (up 7.9% against the dollar, with rates up 55bp, and the pound, with rates up 56bp. At the other end of the spectrum, the Swedes have seen rates fall by 69bp, and the currency has dropped 4.45% against the dollar. Who are the standouts? The SEK, NZD, and AUD are all doing better than the rats moves might imply, the pound, US and Canadian dollars are doing less well. I can’t help thinking that SEK remains vulnerable and AUD in particular, is a sell sometime between now and the end of summer. On this basis, we are more energised to short AUD/USD ahead of September, than we are excited about EUR/USD.

Yep. Add in China re-slowing in Q4. You can take or leave my own view of another local rate cut and/or macropudential action but Glenn Stevens has drawn a line in the sand at 95 cents. Either way, the case is stronger for falls than rises later this year.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.