Open AUD/USD positions according to the results of US-China trade talks

While most large banks, assets managers and hedge funds join the US dollar bears amid a break in the Fed monetary normalization process and a decline in the US economic growth, the forecasts for the AUD are rather controversial. HSBC and Rabobank expect the AUD/USD rate to hit 0.66 and 0.68 in late 2019, while Morgan Stanley suggests a level of $0.67 in Q2, followed by the AUD rise as high as $0.71. The consensus forecast of Bloomberg experts is at $0.74 in late December.

The Aussie became one of the worst-performing G10 currencies in 2018 due to the concerns about a decline in Chinese demand, higher borrowing cost in the USA and lower global risk appetite. Australia 10-year bond yield was lower than its US peers for the first time since the 2000s; and the spread has been in the red zone for several consecutive months, which hasn’t occurred since the 1980s. The derivatives market suggest a 50% probability of a cut in the cash rate form the current 1.5%, also because Australian household debt-to-income ratio is at 189%, compared to 67% in the 1990s. Options indicate that AUD/USD is 42% likely to slide down to 0.66 by late 2019. A year ago, the indicator was at 14%

However, the factor of the Fed aggressive monetary restriction will be no longer pressing the AUD bulls, and the progress in the US – China trade negotiations will support them. The Australian employment is still strong, and the unemployment rate is down to 5%. If the inflation rate increases, the RBA will have a reason to hike the cash rate. In addition, high investment rating of the local securities and resumed interest in the carry trades suggest a moderately positive outlook for the AUD/USD. The consensus forecast of Bloomberg experts at 0.74 can well meet the reality.

Efficiency of carry trades

Source: Bloomberg

It should be noted that, affected by trade wars, Aussies started looking undervalued, both according to the US stock indices and based on the commodity prices. In particular, a key element of Australian, export iron ore is trading much higher, than it could be expected, according to the AUD/USD trend.

Dynamics AUD/USD and Iron Ore

Source: Trading Economics

The AUD rate is undervalued compared to a weighted average, so the Australian dollar may have a potential unleashed. The AUD bulls need a fresh driver and they may count on it if US-China trade talks progress according to the major scenario (China will buy more US products, stop stealing intellectual property and liberalize its financial market), or Beijing offers the U.S. more than it expects. If so, the AUDUSD rate can well rise up to the trading range of 0.732-0.746.