Westpac Look To Buy Dips In AUD/USD

Westpac note that they "consistently viewed the late March to early April A$ tight range trading either side of $0.7600 as likely to eventually break to the top side. Hence the mid-April break of $0.7700 and extension to above $0.7800 made sense to us. U.S. Treasury yields have trended lower so far in Q2, taking some heat out of the U.S. dollar. Moreover, the Aussie's fundamentals have improved. The huge jump in spot iron ore prices to 10 year highs around $187/tonne are backed by record Chinese demand and the ongoing constrained supply confirmed by Vale, BHP and Rio this week. Australia seems set to continue to report historically large trade surpluses. We think the implications of the iron ore price surge are being underestimated in FX markets, with the midpoint of our short term fair value model rising to $0.80, but should come into clearer focus as the federal government's annual Budget looms on 11 May. Domestically, there is concern over Australia's vaccine rollout and the end of the JobKeeper wage support scheme, but employment is already back above pre-pandemic levels, the NAB business conditions index is at a record high and Westpac consumer sentiment at an 11 year high. The RBA will maintain its dovish tone but that still leaves plenty of upside room within A$ fair value ranges. That's not to say there are no risks here. The US$ could, and arguably should, garner support from the super strong US data that will be released through May and beyond, plus the explosion of Covid cases in India; China/ Taiwan incursions and Russian/ Ukraine tensions could also exert downward pressure in risk sentiment in the weeks ahead."

• Their overarching trade recommendation is to buy 1/2 unit of AUD/USD on dips to $0.7680, and another 1/2 unit of AUD/USD on dips to $0.7600, with a stop under $0.7525. They target $0.8000+ through May-June.