Morgan Stanley is negative on the Australian dollar
Earlier this week, Morgan Stanley recommended AUD/JPY shorts in a trade that's now deep in the money.
They think oil currencies should remain volatile in coming weeks but believe it's overcrowded and risky.
"They have been one of biggest shorts for the past year. This view has more medium-term potential once lower energy prices lead to disinvestment, economic underperformance and central bank response. For instance, the BoC will meet on January 20th and accommodative language has the potential to weaken the CAD further.
However, short-term risks of holding short oil currency positions have increased, as an escalation in Saudi-Iranian tensions could boost oil currencies from outside the region, such as CAD or NOK," Morgan Stanley argues.
"Instead of selling oil currencies, we emphasis AUD and NZD shorts. Yesterday's weak milk powder auction will likely weaken the NZD beyond the day with falling local inflation expectations 'forcing' the RBNZ to consider additional easing.
Our bearish AUD call is driven by continued Asian data disappointments, iron ore reversing its 17% December rally and coal prices breaking lower. There are already signs that the rebalancing of Australia's economy has come to an end," Morgan Stanley advises.
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