We have been bearish on the Australian dollar for structural reasons for most of this year.
Iron ore prices fell away in September due to China’s attempts to fight pollution as well
as over-supply from Australia. More recently, we have seen coincident data rolling over,
confirming the negative outlook that leading indicators had highlighted previously. The latest
disappointment in Australia has been retail sales (top-left chart), which grew at their slowest
annual rate in four years. The chart shows GDP also languishing around levels not seen for
several years. As such, we remain bearish on AUD and, as mentioned before, the New
Zealand dollar remains a good candidate to short the Australian dollar against.

While speculators largely remain long on AUD (top-right chart), they are neutral on NZD
(bottom-left chart), presenting an attractive risk-reward opportunity. Building permits, as a
key leading indicator, suggest the New Zealand economy will continue to outperform the
Australian economy (bottom-right chart). Furthermore, our reasons for initially presenting
this trade previously remain intact, as economic surprises and commodity prices continue to
favour New Zealand over Australia.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception