The Australian dollar's top forecaster has a warning: the worst is yet to come.

Investors should bet against the Aussie and short it versus the Japanese yen as increasing global-trade tensions weigh on the Australia's exports, according to CIMB Bank. The currency is also poised to decline versus the US dollar, says CIMB, which had the most accurate estimates for the Aussie in Bloomberg's second-quarter rankings.

The Aussie dollar hasn't had a good run recently, but the worst is yet to come according to the forecast. Bloomberg

"On all fronts, the US-China trade war is Aussie-negative," said Marcus Wong, a treasury strategist at CIMB in Singapore.

"Retaliatory action that inadvertently impacts the upstream or downstream of China's value chain, or leads to a keen deterioration in global risk sentiment, would see a further deterioration in the Aussie."

On all fronts, the US-China trade war is Aussie-negative. Marcus Wong, CIMB treasury strategist

Investors should sell the Aussie against the yen with a short-term target of 80.50 yen, CIMB's Wong said. If the US-China dispute intensifies, Australia's currency may slide to 76.50 yen, which would be the lowest since September 2016, he said. The Aussie traded at 82.08 yen on Tuesday.

The Aussie has dropped against all its Group-of-10 peers this year except Sweden's krona amid concern the US-China trade dispute will cause China to reduce demand for Australian raw materials. Meanwhile, the Reserve Bank of Australia kept its benchmark interest rate at a record low this month, saying Donald Trump's trade policy was causing uncertainties.

Betting against the Aussie

Just as the Aussie is weakening, speculation the Bank of Japan may unwind its ultra-loose monetary policy is boosting the yen. Japan's currency jumped 0.5 per cent against the Aussie on Monday following reports the BOJ may discuss ways of reducing adverse effects of its stimulus when it meets next week.

Leveraged funds this month boosted bets to the highest in more than two years that the Australian dollar will weaken against the greenback. A net 22,126 contracts are wagering the currency will fall, compared with a net bullish position as recently as May.

Australia's currency has slumped 5.5 per cent against the US dollar this year and this month dropped to 73.11 US cents, the lowest since January 2017. CIMB sees it sliding below 70 cents if the US-China trade war escalates.

Bloomberg