We add a short AUD/USD position at 0.6570 (1/2 unit) to our Macro FX ideas portfolio. We sell another 1/2 unit at 0.6635 and stop out at 0.6675. We are targeting a move to 0.6450.

Last night's setback in AUD/USD reinforces our thinking that last week's jump in AUD was not the start of a more pronounced push higher.

The 12% decline in iron ore prices this week, taking its year to date decline to almost 30%, leaves AUD expensive against short term trends in Australia's terms of trade.

Diverging RBA and Fed risks next week potentially make it a challenging week for AUD too. Slowing activity broadly tracks RBA expectations and Q1 CPI is not released until 24 April, so it’s too early for an RBA pivot to an easing signal. But even so, the risks around a likely placeholder RBA meeting are on the slightly dovish side. For example, “…a further increase in interest rates cannot be ruled out” may be tweaked to say, “…cannot be entirely ruled out”.

Against that, the median Fed dot for 75bp in 2024 cuts is flimsy, needing just two officials to change. The hawkish repricing to 2024 Fed expectations lost momentum in recent weeks, hitting a floor as it approached the Fed’s median 2024 dot. We wonder whether next week’s FOMC might bring renewed momentum. As it is, after two consecutive stronger CPIs, the March and April prints ahead of the June meeting must print decisively softer to give officials the confidence to ease.

The main short term risk to our idea is a sharp decline in USD/JPY around firming BoJ policy expectations. While that could see a range of JPY-crosses decline, including AUD/JPY, a firmer JPY could trigger wider USD declines, as we saw last week. The timing of next week's BoJ announcement coincides with the RBA and potentially overshadows it.

#cny

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