Australia's monetary policy and investment implications

The preferred way of expressing the downside macro risks in Australia is via a short position in the Australian dollar versus the U.S. dollar. 

Although the RBA will ease policy further, this outlook appears reasonably priced into bonds, with interest rate markets indicating that the policy rate should reach 1.75% in 12 months. 

Being short the Australian dollar versus the U.S. dollar should also be advantageous when the U.S. Federal Reserve exits its zero interest rate policy, expected in 2015.

"We think adding euro- and U.S. dollar-denominated corporate bonds to Australian portfolios on a fully hedged currency basis is an attractive way to add credit exposure in the current environment" says PIMCO Publications

A reasonably constructive global growth backdrop should continue to support credit markets, and the recent widening in cross-currency swap basis spreads gives portfolios the potential to lock in additional yield when hedging the currency exposure back to the Australian dollar.