HALISTER1: UBS FX Hedging Model Sees Aussie Downside Risk Vs U.S. Dollar

UBS FX Hedging Model Sees Aussie Downside Risk Vs U.S. Dollar

(Bloomberg) -- In-house modeling suggests Aussie investors will be 1.5%-2.8% better off in the next twelve months by not hedging their USD exposure, Joakim Tiberg, strategist at UBS writes in note today.
  • FX forwards imply 1.5% of AUD/USD depreciation over the next year; range is consistent with a 3.0%-4.3% fall from 0.7450
  • UBS’s year-end forecast indicative of 7.5% AUD to USD unhedged out-performance with pair at 0.6800
  • Long-term and short-term models have prediction rates of 76% and 87%, respectively
  • Three factors that have been good at predicting when to hedge:
    • RBA Commodity Index (U.S. dollars)
    • Market pricing of relative monetary policy paths using changes in AUD 1y1y – RBA cash rate and USD 1y1y–fed funds mid
    • Risk premium index comprising changes in VIX, US HY, MOVE, TEDUS, MXEF and Russell 2000
  • AUD/GBP hedging decisions close to coin flip, but heavily influenced by “Brexit” fears
  • Australian investors may want to consider hedging their EUR exposure, conversely EUR-based investors could take the AUD carry
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Joakim Tiberg (UBS Asset Management Japan Ltd)

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