MNI MARKETS ANALYSIS: Aussie At Risk Of Further Down Leg

--Tuesday's RBA Rate Meeting and Upcoming Election Pose Risks

By Stuart Allsopp

     SINGAPORE (MNI) - The Aussie dollar has broken firmly below the key 0.70

level against the greenback, following news over the weekend of extended U.S.

tariffs on China coming into play, and a close around these levels would mark

the weakest close since January 16, opening the crash lows seen on January 3.

Declining Australia-U.S. real yield spreads and a possible Labor victory at the

upcoming election add to the fundamental case for further downside.

     --REAL YIELD SPREADS CONFIRM BEARISH TREND

     Australia-U.S. real bond yield spreads have moved lower in recent weeks

largely on the back of rising expectations of RBA interest rate cuts, with

markets now pricing in a cut by the June meeting. Increasingly negative real

yield spreads provide a fundamental basis for further AUD downside, with the

10-year spread now at -34.8bps even as Australian breakevens remain under

downside pressure.

     --RBA COULD GO EIEHTER WAY

     The Reserve Bank of Australia meets Tuesday and markets are evenly split on

cut or hold, although a narrow majority of economists surveyed expect a cut. How

markets respond over the course of the remainder of Monday's trading could be

key to whether a cut is forthcoming.

     --ELECTION RISK

     An additional level of risk comes from the upcoming election. While a

victory for the opposition Labor Party is widely expected according to the

bookmakers, there is certainly potential for the currency to depreciate further

should the victory be confirmed.

     That said, with the Australian Prime Minister Scott Morrison emphasising

the Coalition's reputation for providing sound economic management, rising

external risks in the form of heighted US-China trade frictions could play into

the government's hands. Given the much stronger likelihood of lower taxes rather

then lower spending under a coalition government, such an election surprise

would likely see a spike in the Aussie dollar.

     Implied volatility levels also spiked Monday on the back of the trade

tariff talk but remains historically low, suggesting there is potential for a

renewed spike given the upcoming closely watched rate meeting and election

dynamics.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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