UBS analysts recommend buying AUD against NZD and CAD on the basis it is a risk neutral trade. If the market goes into risk aversion, AUD will remain stronger against the commodity currencies. RBA is finished cutting rates and will probably raise rates faster than other economies. Australia's yield curve (as proxied by adding 2- and 10-year government bond yields) has been trending higher recently partially fuelled by media speculation that the RBA is done cutting rates, despite maintaining an easing bias in its communication.

The basket trade is also not 'yet another risk aversion trade'. While it's true the basket suffered during the Lehman crisis, the swings since November do not match swings in the stock market.

The AUD has been trending higher against NZD and CAD and we believe that the underlying justification for the strong upward trend remains.. The AUD basket has underperformed it's upward trend in July since diplomatic tensions between Australia and China increased, but these concerns will likely fade allowing the AUD to appreciate again relative to its peers, NZD and CAD.

In the week ahead we would focus on the large US Treasury issuance, earnings in the US and earnings in Japan. The RBNZ meet on Thursday but we expect no change in policy. Our near-term bias (1m) is for further US dollar weakness, although we see the chance of risk aversion returning and hence a stronger dollar on a 3m outlook.