Foreign exchange strategists at Morgan Stanley have told clients they are looking to sell the Australian Dollar against the US Dollar in the week commencing July 10.
“We add a strategic short position in the AUD, seeing rising bond yields as negatively affecting the AUD and Australian bank funding costs,” say Morgan Stanley in a foreign exchange briefing dated July 10.
Expected to give the US Dollar an advantage are economic data which have stabilised of late and are expected to improve from here.
“The rise of German bund yields are spilling over into the US treasury yield too, providing a boost for the USD,” say Morgan Stanley.
Meanwhile the AUD is negatively correlated with US bond yields.
“Iron ore prices are having less of an impact on the AUD than in the past, therefore the recent rise doesn't worry us for this FX trade,” say Morgan Stanley.
Note that we have just provided an article here that suggests that iron ore still matters for the currency and the recent stabilisation in iron ore prices might play positive for the Aussie.
With regards to monetary policy, Morgan Stanley believe the RBA is expected to keep interest rates on hold for the foreseeable future, with the RBA's Harper reiterating this in a press release issued following the July policy meeting held last week.
“We see economic data in Australia underperforming that in the US,” add Morgan Stanley.
This week the market's focus will be on Fed Chair Yellen's testimony.
In Australia the only data point of importance is the release of July consumer inflation expectations.
“The risk to this trade is that positive risk sentiment keeps the USD weaker than we expect,” say Morgan Stanley.
Analysts say they like to sell AUD/USD at 0.7650 with a target of 0.7200 and stop at 0.7740.