LIVE MARKETS-Australian dollar 'unduly sold off' - UBS

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AUSTRALIAN DOLLAR 'UNDULY SOLD OFF' - UBS

The Australian dollar has been excessively sold off in the recent market turmoil, says UBS Wealth Management's head of global FX & commodities Dominic Schnider who recommends traders express this by taking long Aussie positions versus the pound.

Tariff-related shocks and the deteriorating US-China relations have contributed to the Aussie lagging peers; it rose 2.5% versus the dollar in April, AUD=D3 much less than the euro EUR=EBS and Swiss franc which rose 4.7% and 7% respectively. CHF=EBS, CHFUSD=R

"We believe the AUD has been unduly sold off with our modelling of the direct tariff impacts on Australia modest, while indirect impacts should be offset by Beijing’s commitments to policy support," writes UBS.

A less aggressive stance from the Trump administration on China and some easing of retaliatory tariffs by Beijing offer hope of a desire to strike a deal, they add.

"Outside this, recent Australian CPI and labor data make it more difficult for the Reserve Bank of Australia (RBA) to match more aggressive money market expectations (for rate cuts)," they write.

Markets are currently pricing 125bps worth of RBA cuts 0#AUDIRPR by June next year, but UBS say this "won't be matched at least without more extreme global turmoil.

As to the short sterling side of the trade, they think pricing for the Bank of England rate cuts is much more consistent with their view, while positioning data shows a non-commercial investor net-long in GBP but a net short in the AUD.

(Lucy Raitano)

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