Morgan Stanley on the AUD, in the context of the upcoming Xi - Trump meeting on the weekend.

MS outline benign and an non-benign scenarios.

Benign:

  • there is a reasonable probability of a constructive statement emerging or even a pause in escalation
  • Markets would likely interpret such an outcome at the G20 as positive

Non:

  • Absent this type of pause, though, the previously-announced tariff rate increase to 25% on January 1 would likely proceed as planned, with further implementation of tariffs on the final US$267bn of Chinese imports in 1H19 a serious risk

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Trading a pause in escalation:

  • We would ultimately fade any FX moves on the back of such a pause as this is more likely to serve as a temporary respite than an outright end in escalation.
  • Fundamental disagreements between both sides suggest an ultimate de-escalation only when a further weakening in the US equity market or similar circuit breaker emerges.
  • Benign G20 outcome should boost AUD
  • The ongoing trade tensions have been one of the main drivers of AUD weakness this year. If we extract current trade tensions and assess AUDUSD valuations by using traditional fundamental variables (commodities, rate expectations, spot rate differentials and inflation differentials), our model suggests AUDUSD is marginally below the current fair value of 0.7524. Should a positive outcome emerge from this Saturday's meeting between Presidents Trump and Xi, AUDUSD could gravitate towards this level.
  • Despite the more than 10% drop in iron ore prices last week, which was motivated by declining margins of steel producers linked to oversupply this winter, AUD stayed relatively stable. Street estimates are converging towards a consensus of near-term stabilisation, also supporting a tactical AUD rebound. In the medium to long term, we remain bearish on AUD for reasons relating to household debt, current account deficits and wide rates differentials against the US.

Trading a less happy outcome:

  • AUD may be vulnerable in this scenario
  • AUD sentiment has recovered in recent weeks from contrarian low levels and a recent uptick in data (like the recent employment report) offers more attractive selling levels
  • To this end, investors looking to position for a less benign trade outcome might prefer AUD shorts, particularly against safe haven currencies like JPY

(bolding mine)

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pls note this is from a piece prior to Powell's market-moving statements overnight