Morgan Stanley said this week to forget about USD strength, and doubled down on a bearish call where they see the DXY falling another 10% over the coming year. “The Fed’s reaction function shift suggests a sustained period of the USD bear regime, which means a large but increasingly broad USD sell-off. We expand our USD ‘sell list’ to beyond the DXY majors to include AUD and CAD.” In other words, MS is bullish on the AUD and CAD and sees other currencies performing strongly in the year ahead against the greenback.
My outlook for the A$ is that a topside breakout is looming ahead on the 10yr monthly chart below. The Aussie is pressuring topside resistance from the downtrend in place since the 2020 highs. The RBA is set to ease in the year ahead, but has much less scope to cut rates than the Fed. A terminal rate of just below 3% is probable by December next year, but this could occur in tandem with much deeper cuts by the Fed. Rate differentials between Australia and the US could therefore narrow sharply. The dot plot foreshadows a terminal rate for the US of 2.9% which would bring Australian rates into line for the first time in many years.
Coupled with higher commodity prices, the A$ could soon break out and confirm an inflection. Returning upward momentum could see the Aussie soon retest the next resistance cluster near US70c, which is consistent with our bearish view on the greenback.
Carpe Diem
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