Taking active positions in currencies is one way to express particular macro views or hedge against specific risks, such as an escalation in trade tensions. Ideally, these positions provide an asymmetric risk profile—moving a great deal if a risk outcome we are hedging happens, while only moving somewhat if the event does not.
We believe that short AUDUSD and short USDJPY are two trades that fit the bill.
Short AUDUSD to hedge trade tensions
Australia is a small open economy with significant commodity exports, many of which go to China, an engine for global trade. This makes the Australian dollar highly sensitive to global growth and China's economic prospects.
As such, AUDUSD is likely to depreciate meaningfully if US-China trade tensions escalate, raising downside risks to China (and global) economic prospects.
What makes AUDUSD particularly interesting as a short though, besides being a highly liquid currency, are Australia's idiosyncratic domestic economic pressures.
Core to this is Australia's cooling housing market, which had previously been a meaningful support to household wealth and consumption.
Another trade that may offer protection against an escalation in trade tensions and/or more significant slowdown in global growth is short USDJPY.
Historically USDJPY has been particularly sensitive to rate differentials, so aggressive easing from the Fed should help this trade.
And of course, JPY remains a popular safe haven currency. Japanese investors have the largest net international investment position of any G10 country. In other words, they have the most money to repatriate when market volatility picks up.
Like short AUDUSD, there are other reasons why we like short USDJPY.
Perspectives matter. Tune in to our insights.