AUD/USD is a Sell say Morgan Stanley, Target 0.65
Strategists at Morgan Stanley are calling the AUD/USD substantially lower and why a bearish pennant on the silver price bodes ill for the antipodean currency.
Morgan Stanley have cited four fundamental reasons for being bearish the currency pair.
China is the largest importer of Australian goods, and the first reason is that the Chinese economy has become unbalanced and is likely to see growth slow, even though up until now growth has been better-than-expected.
This will result in less demand for Aussie goods causing weakness to the AUD.
The second reason is that the dollar is forecast to rally as a result of steepening yield curves as the inflation outlook and tightening monetary policy in the US suggest higher inflation in the long-term.
Thirdly Australia’s labour market has turned soft as a result of a downturn in mining investment and property, two major employers.
Finally, the new RBA governor Lowe, appears to be leaning on the dovish side more recently even if his opening speech gave no hint he was planning more stimulus or lower interest rates.
In relation to the fourth rationale, this week’s CPI release will be key in gauging future policy.
Morgan Stanley say the biggest risk to the outlook lies in a rise in Iron Ore prices.
Sell the AUD/USD pair from 0.7670 down to 0.6500, placing a stop at 0.7750, recommends Morgan Stanley in its most recent FX pick to clients.
Bearish Pennant on Silver
The Australian dollar often shows a close correlation to Silver prices, since Australia is a major silver exporter.
Metals also tend to correlate with each other to a relatively high degree, so any weakness in silver is often mirrored by a fall in iron ore, Australia’s largest export and another commodity displaying a high degree of correlation with the Australian dollar.
CMC Markets Ric Spooner has noted a negative chart pattern on silver prices which bodes bearish for the commodity.
He notes a bearish pennant pattern on the daily chart.
“There are 2 essential elements of this pattern. The first is a vertical “flagpole” leading into the pattern. The vertical move is about urgent, high momentum, directional movement. This flagpole saw 10% wiped off the silver price in 4 days.
“The second essential element is a tight triangle formation. This represents a brief correction. The logic of the pattern is that if price breaks out of the triangle in the same direction as the “flagpole” there’s a decent chance the high momentum move will resume,” says Spooner in the CMC Market’s blog.
The current pennant on Silver is slightly complicated, however, by the existence of the 200-day MA at the pennant lows which is likely to act as a tough barrier to further downside and needs to be surpassed before bears can have confidence the price will go lower.
“This pennant is supported by the 200-day moving average. At this stage, price is drifting around the lower boundary of the pennant which is not encouraging.
“The bears will want to see it break down before too long and not just dribble around the apex of the pennant.
“However, a clear break below the 200-day moving average in the near future could be significant,” says the CMC analyst.