Investors should sell on any rebound in ‘risk’ currencies like the Australian and Kiwi dollars, says Morgan Stanley's head of U.S. forex strategy, as the currencies will come under pressure in the next six months.
"We'd like to see the Aussie lower, in fact the little bounce that we saw in the Aussie...I would like to sell Aussie on that bounce; similarly for Kiwi and similarly for Canada," Gabriel de Kock, Executive Director of FX Research at Morgan Stanley told CNBC on Wednesday.
The Australian and Kiwi dollars rallied in the New York session on Tuesday after reports the European Union was planning to recapitalize the region's banks. But de Kock argues that this rally would be short-lived as Europe's funding strains was being felt in emerging markets and Asia. According to data from the Bank for International Settlements (BIS), European banks currently account for half of the total foreign lending to Asia ex-Japan economies.
The Australian dollar fell to as low as $0.9494 in early Asian trade on Wednesday after rallying to $0.9567 overnight. It was a similar story for the New Zealand Dollar, which dipped to $0.7591 in Asia after rising to $0.7611 in New York.
"With the currencies depreciating, emerging market policy makers cannot ease policy as much as they would have liked to, which means that we are going to see weaker economic activity in emerging markets as well," De Kock explained. The slower growth will keep the Aussie dollar at around $0.95 through till the end of the first quarter next year; and the Kiwi dollar at $0.76 over the same period.
According to Morgan Stanley, which has its own independent gauge tracking currency positions in G10 countries, a build-up of short positions in the Australian dollar was underway. However, long positions in the New Zealand dollar are already unwinding.
"We're seeing the Kiwi as particularly vulnerable from an external funding position, and also from the position of economic activity and exposure to broader Asian economic conditions," de Kock said. He recommends selling the New Zealand dollar against the yen, expecting the Kiwi to fall to 55 yen in the short term.
"We believe that with the current risk-off environment, two currencies that are going to be the clear winners - the U.S. dollar and the yen," he said.