Turning Bullish AUD & Bearish CAD - Morgan Stanley

AUD: Bullish Following Rate Cut.

We have turned bullish AUD in the near term and believe it can continue to rally following the RBA's rate cut. AUD's reaction to the rate cut is telling, given it ended the day over 1% higher against USD despite the rate cut not being fully priced in. As the hunt for yield remains strong and the RBA's lack of an easing bias indicates no easing catalyst any time soon, we expect AUD to appreciate (particularly against USD). RBA Gov. Stevens' outgoing speech also gave no indication that further easing is imminent. Our long-term bearish view remains, but is contingent on the housing cycle turning and slowing growth in China forcing the RBA to cut 50bp further in 1H17.

CAD: Bearish Following Weak Data.

We have turned bearish CAD last week following the week employment and trade data, expecting it to underperform other commodity currencies in coming weeks. On the trade side, the nominal deficit was the largest in history, at C$3.63b, with export volumes falling 1.4%. The details were also weak . Non-commodity export volumes fell once again (by 0.4%), bringing them nearly 9% below their January peak. The BoC lowered its forecasts for non-commodity export growth this year, but these figures are still disappointing and support our view that the BoC is too optimistic about an export-led recovery. These figures, along with the weak May retail sales volumes and GDP growth, mean the BoC's 2Q GDP forecast of -1% is probably too optimistic. Friday's employment data, which has been relatively resilient amidst Canada's tepid growth in recent years, was also disappointing. We may not get a shift in tone yet from the BoC but in an environment of commodity currencies receiving support (most with improving data), we think there is scope to price a higher probability of cuts in Canada curve.

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