Money in Motion

Aussie Is Too Down Under: Pro

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If you've been long the euro against the Australian dollar, congratulations. The common currency has risen sharply in the last ten weeks, from well under 1.2200 to nearly 1.2400.

But don't linger, says Sue Trinh, senior currency strategist at RBC Capital Markets.

Trinh argues that both structural and cyclical factors should send the Aussie significantly higher.

s recent credit rating cut from Moody's "highlighted the continued risk of wholesale downgrades across the region and the ever shrinking pool of AAA rated issuers," she wrote in a note to clients. "Australia is one of the few strong AAA sovereigns and would still be the highest yielding G10 currency, even if the RBA were to ease as much as discounted by the forward curve."

On the cyclical front, RBC has examined the degree to which economic reports in the euro zone and Australia diverge from forecasts, and in which direction. Trinh says the firm's Economic Surprise Index for Australia is close to four-month highs - but the index for the euro zone is near four-month lows.

"The last time there was such a stark contrast in the news flow, it marked the start of a ten big figure fall in EUR/AUD toward 1.16," Trinh says. She believes the euro is likely to reach 1.16 again against the Aussie once investors start weighing the factors she sees.


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