The Australian dollar is facing a big challenge this week, the quarterly CPI release. The team at Morgan Stanley sees downside potential for the pair.

Here is their view, courtesy of eFXnews:

Currency investors should consider selling AUD/USD this week, advises Morgan Stanley in its weekly FX pick to clients this week.

“Sell AUD/USD at 0.7670 with a target of 0.6500 and stop at 0.7750*,” MS advises.

“We see AUD vulnerability coming from four angles:

First, China has achieved better than expected GDP growth, but it appears the economy has become more unbalanced. We expect China to slow down from here. Second, the USD is expected to rally with the help of steeper yield curves. Third, Australia’s labour market has developed early weakness. With mining investment staying weak and housing slowing down, two important pillars for employment growth have weakened. Fourth, the new RBA Governor Lowe seems to be leaning towards the dovish side. This week’s CPI release is being watched by markets,” MS says as a rationale behind this call.

“The risk to this trade is a rise in iron ore prices,” MS adds.

*MS runs a limit order to sell AUD/USD in its strategic portfolio with the same entry, stop, target levels.