MS: Sell AUD with both hands

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From Morgan Stanley:

2016-11-30_15-23-14

For a trade into year-end we suggest selling AUDNZD driven by terms of trade differentials.

In general, when analyzing commodity currencies it’s hard to stay away from monitoring data from China. Yesterday we learned that the Chinese authorities were going to restrict mortgage lending further by raising deposit requirements. With the aim of reducing the bubble in the housing market and combined with already announced measures that limit borrowing from construction companies, there is now a risk of slowdown in China’s iron ore and steel requirements. That sets AUD of for another bout of weakness as iron ore prices have again failed to surpass $80. In contrast, the Chinese demand for dairy products continues to boom, helping whole milk powder prices rise 15% November.. The upcoming Fonterra auctions are expected to be strong a reduced supply after the New Zealand earthquakes. Sell AUDNZD
The second trade, which could work for the whole of 2017, which plays on the growth potential differential between the US and China, is to sell AUDCAD.
We don’t expect the bank Canada to cut rates in 2017 as inflation and growth have stabilized. In fact the economy may even see support from fiscal stimulus in the US. The bar for the Bank of Canada easing appears very low now as a Bank of Canada’s own fourth-quarter GDP forecast has been revised down to 1.5% and Gov. Poloz said recently that an oil price shock will be required to depart from its current outlook (which we interpreted as oil prices heading back to and staying in the $30 handle).
MS maintains a short AUDNZD in its strategic portfolio and promotes selling AUDCAD in is top 10 trades for 2017.
Too right though I would not buy other commodity forex either.

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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.