AUD/USD: Aussie set to extend advance as reflation trades continue to outperform – MUFG

Analysts at MUFG Bank, have the idea of a trade to long the AUD/USD pair, with an entry at 0.7840, a target at 0.8120 and a stop-loss at 0.7700. 

Key Quotes:

“We are recommending a long AUD/USD trade idea. We have been encouraged by recent positive price action for the Aussie which continues to outperform alongside other commodity currencies. The AUD/USD rate has just risen to new highs after taking out resistance from the 6th January high at 0.7820.”

“The Aussie is continuing to benefit from the outperformance from building optimism over the global growth/reflation outlook which is helping to improve Australia’s terms of trade. The RBA noted earlier this week that the trade-weighted Aussie would normally be expected to be around 5% higher based on higher commodity prices, but upside has been dampened by the RBA’s loose policy stance. Still yields have risen sharply in Australia with the 10-year government bond yield rising back above 1.4% from just below 1.0% at the start of this year. Yields remain amongst the highest on offer within the G10. At the same time, the Aussie is deriving support from the strength of relative strength of the cyclical recovery in Australia.”

“The main downside risks to the trade are that rising US yields could eventually trigger a correction lower in risk assets although they have been fairly resilient so far. The AUD has the highest correlation to equity market performance within the G10. Elevated long AUD positions and technical RSI indicators also signal an increasing risk of a correction lower.”