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MORGAN STANLEY RESEARCH
November 27, 2013
FX Pulse

While the AUD does not show up on our Investment/GDP
growth metric as particularly vulnerable, the extent and
effectiveness of business investment in Australia has been
raised by policy makers as an issue. The RBA noted in its
minutes from the November 5 meeting that investment in the
mining industry is declining and has highlighted that
investment projects are starting to be shelved. Australia’s
investment boom has been led by the resource and mining
industry, which has become highly dependent on demand
from China. The rebalancing of the Chinese economy and the
downward pressure on commodity prices has the potential to
leave some of the most recent investment decisions
appearing to be a misallocation of capital.

view. Sweden also had the highest growth of investment to
GDP relative to overall GDP growth in the last year,
something we view as a potential signal of unproductive
investment, which could also leave the SEK vulnerable in an
environment of less favourable funding conditions. Indeed, we
have already identified the SEK as vulnerable to the
disinflationary pressure being generated in the Eurozone (see
FX Pulse Disinflationary Spillover, November 24, 2013), which
could prompt the Riksbank to take further action, with a
potential rate cut. Indeed, the CPI decline back into negative
territory over the past month has generated increased market
expectations of further monetary policy easing in Sweden.
Our economics team believe that the Riksbank could act with
a 25bps easing as early as the December 17 meeting (see
European Economics Rethinking Central Bank Action,
November 25, 2013), leaving the SEK exposed to the
increasingly negative fundamental backdrop. Hence, we
maintain our bullish USDSEK position.
Exhibit 3

Eurozone and Swedish CPI
4.0

5

Eurozone CPI (y/y)
(RHS Scale)

3.5

4

3.0
3
2.5
2

Percent

Although the Chinese media (e.g., China Securities Journal)
have suggested that the deleveraging process should be
slowed down, this is currently not being reflected in market
developments, and the continued tightening of financial
conditions via both the exchange rate the higher interest rates
will have a direct negative impact on the AUD, in our view.

2.0
1.5

1

1.0

0

Exhibit 2

AUDCNY and Australia-China 10-Year Yield Spread

0.5

Sweden CPI (y/y)
-1

0.0

1.75

7.50

-2

-0.5

1.50

7.25

1.25

7.00

AUDCNY

-1.0

-3
99 00

01

02

03

04

05

06

07

1.00

6.75

Percent

Chinese rates, along with the appreciation of the CNY, have
resulted in a tightening of financial conditions, providing a
negative environment for the AUD. Indeed, Chinese 10-year
yields have continued to push higher, providing support for
the CNY, which is likely to be a negative for the AUD.
AUDCNY is likely to head back to the recent lows in our view
(see Exhibit 2).

08

09

10

11

12

13
Source: Reuters EcoWin

Source
6.50

0.75

6.25

0.50

6.00

0.25

5.75

0.00
-0.25

5.50
5.25
5.00
Apr

Australia-China 10Year Yield Spread

-0.50
-0.75

Jul

Oct
11

Jan

Apr

Jul
12

Oct

Jan

Apr

Jul
13

Oct
Source: Reuters EcoWin

Source: Reuters Ecowin, Morgan Stanley

Leveraged SEK at Risk
Sweden also stands out as a highly leveraged economy with
the highest level of private sector debt in the G10 (see Exhibit
1), where the steepening of global yield curves has the
potential to generate a negative impact on the SEK, in our

CAD: Change of Behaviour
While the major currencies have seen a general increase in
their sensitivity to relative changes in yield curves, the highest
betas among the G10 remain with the commodity-related
currencies. Interestingly, the CAD stands our as being the
currency that is most vulnerable to a relative steepening of the
US yield curve. Canada is also ranked second on our relative
investment to overall growth metric (second behind Sweden),
highlighting the potential that recent investment in Canada
could have been unproductive.
Hence, we anticipate a change in the CAD’s behaviour from
previous cycles. Historically, the CAD would have been seen
as a beneficiary of a US recovery, with the Canadian

3