Morgan Stanley says AUD/USD overvalued:
Though the markets were pricing in a high probability of action, the RBA recently instead left policy on hold, despite a further collapse in iron ore prices, notes Morgan Stanley.
AUDUSD monthly chart
"We think the RBA may be falling behind the curve, and that the AUD remains overvalued, given the large decline in Australia's terms of trade over the past few years," Morgan Stanley writes.
"Furthermore, given the rebalancing currently occurring in China - with the government moving away from manufacturing/export dependence and toward a more balanced growth strategy involving domestic demand - China's import basket is likely to continue shifting away from the industrial metals that Australia exports," Morgan Stanley says.
"With terms of trade skewed to the downside, there is likely to be further pressure on Australian corporate profitability, income, and wages too. This is likely to prompt the RBA into action later this year; we forecast another 50bps of easing, shrinking the yield differential between Australia and the rest of world - which we believe will help spur further AUD weakness," Morgan Stanley says.
In line with this view, Morgan Stanley targets AUD/USD falling to 0.69 by the end of this year compared to 0.77 now.
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