From Morgan Stanley's weekly 'FX Pulse' - a snippet or two on the Australian and New Zealand dollars, say both

  • have traded poorly as political risks have increased

In Australia, the government's legislative majority is under threat

(ps. I have most recently posted on this yesterday)

  • We believe booming commodity prices should prevent the AUD from breaking significantly lower for now,and we remain confident in AUD/NZD reaching our 1.12target

AUD to appreciate against CHF, NZD

  • Bullish: Building Approvals, Private Sector Credit, Commodity Index
  • We remain tactically bullish on AUD, a view best expressed against CHF and via AUDNZD, targeting 1.12
  • AUDUSD has remained relatively supported despite a decline in our daily sentiment index, perhaps reflecting the strength of commodity prices and growing bullish sentiment over China.
  • Longer term we remain bearish on Australia, given its issues with housing and the sensitivity of the Australian banking system to global funding costs, though the 'Goldilocks' scenario of high growth and low inflation should support higher carry currencies in the short run

New Zealand

More problematic is the outlook for the NZD one month ahead of its General Election

  • a weakening economy
  • and calls to turn the RBNZ's inflation targeting regime into a currency targeting one boding poorly for NZD

On the election (due September 23):

  • The probability of either of the two largest parties obtaining an outright majority is extremely low
  • The result is that government policy may potentially serve as a headwind to growth
  • The NZ government already revised lower its forecast for growth

(ps. see here for this)

On the NZD:

  • We also expect the RBNZ to remain on hold until the first half of 2018
  • clear that the RBNZ is uncomfortable with NZD strength
  • Technicals also support NZD lower
  • We note that NZD is sensitive to US rates given its high carry status and rising US rates should weigh on NZD as well
  • Sell NZDUSD to 0.71
  • Bearish: Building Permits, Business Confidence, QV House Prices
  • We remain structurally bearish on NZD, particularly against AUD and EUR
  • NZDUSD is displaying a classic "head and shoulders" pattern which is a bearish signal
  • We look at 0.7120 as a key resistance level to watch
  • The fundamental outlook in NZD bears watching, with the "NZ First" party likely to have sway over the government post- election on September 23, limiting migration and thus growth
  • The RBNZ is also unlikely to hike rates before 2018 and would welcome NZD depreciation