Top-10 investment strategies for 2019: #6

#6 Short AUD
Philip Wee16 Jan 2019
Photo credit: AFP Photo

AUD/USD will remain weak and trade in a lower 0.65-0.70 range in 2019 on a further deterioration in Australia’s negative interest rate differential against the US. We see two increases in the Fed Funds Rate totalling 50 bps to 3% or double the level of its Australian counterpart.

The Reserve Bank of Australia is set to keep its cash rate target unchanged at 1.50% for a record third straight year on increased domestic and external risks to the economy. The RBA will need to downgrade, in next month’s Statement of Monetary Policy, its 3.25% growth forecast for 2019. Having slowed to 2.8% YoY in 3Q18 from 3.1% in 1H18, real GDP growth is likely to further retreat below 3% into 1H19 before bottoming out.

Apart from Black Friday and Cyber Monday sales, there was no Christmas spending spree in 4Q18. Falling house prices have led consumers (especially heavily indebted mortgage holders) to tighten their wallets and led to a slump in construction activities. The Royal Commission into misconduct in the bank and financial services sector has (ahead of its final report in February) already slowed credit growth. The negative spill-over effects into business confidence and investment expectations were evident in recent surveys.

On the external front, pessimism over China’s slowing economy has not offset the optimism for a possible US-China trade deal next month. Weaker demand from China would weigh on growth in East Asia, the destination for some two-thirds of Australia’s exports. Australia is also a favourite tourist destination for many Chinese and Asian travellers. Not surprisingly, the AUD has a strong correlation with the region’s currencies.

Against this dovish background, the RBA’s tightening stance is now regarded as technical. The RBA has indicated, under a worst-case scenario, its willingness to cut rates and the option to use quantitative easing in a crisis.

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#1 Bet on more rate hikes by the Fed
#2 Looking for USDSGD to hit 1.40
#3 Long Indonesian equities
#4 Support for high grade credit, especially BBB
#5 Bullish 10Y China govvies
#6 Short AUD
#7 We like short-dated Chinese BBs for carry
#8 India govvies curve to steepen
#9 Short CNY
#10 Long S-REITS as a defensive play

Philip Wee

FX Strategist - G3 & Asia

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