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The resilience of US equity markets to the distractions of the Trump administration is a positive backdrop for risk-sensitive AUD. Chinese markets are of course less helpful as the deleveraging push continues, but the uptrend in steel prices suggests the potential for recovery in iron ore prices. The rebound in Australian job creation keeps RBA rate cut talk at bay. But multi-month, we expect the ongoing rise in US interest rates to chip away at AUDUSD, leaving it around 0.73 by Q3.
Our RBA outlook (on hold for some time) is anchoring front end valuations. We expect 3yr swap rates to remain in a 1.8% to 2.3% range, with core inflation still below 2%.
The below trades experienced a double-whammy this week as the European reflation story lost steam, oil prices fell and Australian data, particularly the labour market report, printed firmer than expected.
The medium-term views on these currencies are unchanged: we are still bearish on AUD on the expectation that the RBA will deliver two rate cuts (admittedly later than expected; now 1H18 from 2H17), still bullish on CHF and NOK on reduced central bank intervention and cheap valuations, respectively, but were nonetheless stopped out of these trades (two at a modest profit and two at a loss). The near-term European reflation story could take a breather as economic momentum has become neutral from positive.
Short AUD vs EUR, long CHF vs USD and short NOKJPY.
Short AUDCHF at 0.7170.
Long EURAUD via mid-month futures contracts.
