Published: April 10th, 2024
Wall Street and global banking giant Goldman Sachs says the Australian Dollar should be demonstrating stronger performance in 2024, but two factors have held it back.
A currency research note published this week says rising equity prices and improving global financial conditions over the year-to-date have created an environment that’s typically AUD-friendly. Negative sentiment on China, however, has weighed on AUD over the same period, ‘and apparently this remains the case.’
‘Any period of positive growth repricing would normally be supportive for a pro-cyclical fiat like the Australian Dollar,’ Goldman’s analysts wrote, ‘but that strengthening impact has not been a factor this year’.
Goldman’s researchers found that the correlation between Aussie returns and Chinese equity performance has been elevated, and that has made a significant contribution to AUD performance.
But another issue is making its impact felt, as AUD is also underperforming its normal beta to American equities. Despite what should be a favorable pro-cyclical backdrop, AUD has been under pressure from both of these factors.
A third driver could be the waning influence of monetary policy on currency performance in Q1, Goldman adds. The Reserve Bank of Australia (RBA) took a neutral policy stance in March, ‘aiming for the middle of the G10 pack in terms of interest rate policy,’ says Goldman’s analysts.
‘In previous markets where similar conditions prevailed, we would have expected AUD to be an outperformer. Now that its historical beta to equities is being muffled and concerns about Chinese growth are still spooking investors, AUD may need more time to react to these market stimuli.’ AUD started 2024 on the back foot
In mid-January, the Aussie’s position as the worst performing G10 major was re-confirmed after release of under-consensus labour market figures.
AUD softened after the Australian Bureau of Statistics (ABS) said the country lost more than 65,000 jobs in December 2023, chilling a market that was looking for around 17,000 jobs to be created.
Gains for the Sterling to Australian Dollar rate reached a new multi-month high of 1.93 shortly after the economic print was released. The AUD/USD rate fell to 0.6524, before bouncing back to its previous level.
An analyst note from Commonwealth Bank of Australia said AUD/USD had fallen briefly to 0.6520 just ahead of publication of the Australian labor force survey. The ABS release counted the number of people in full-time employment down by more than 106,000. Economists at Westpac noted in a separate analysis that the drop represented the biggest one-month fall on record, not counting the ructions that occurred under COVID-19.
Australia’s labor participation rate sunk to 66.7 per cent in December, which was notably less than the 67.2 per cent economists were looking for. The overall unemployment remained stable at 3.9 per cent.
The ABS figures were partly explained by seasonal shifts, a pattern that has featured in Australian labour market data before. Westpac said that reality should mitigate any significant downside risks for AUD.
'Both the robust employment figures seen in October and November, and the fall registered in December, are consistent with seasonal patterns in employment growth we've seen in previous years,’ said the ABS.
'What it reflects is the hiring of extra staff by businesses in October and November, rather than waiting until December,’ Commonwealth Bank of Australia.
The Australian Dollar (AUD) was weaker against G10 peers at mid-year 2023, as expectations for a RBA rate hike retreated following publication of minutes from the central bank’s June policy meeting
The RBA raised the cash rate 25 basis points in late June 2023 and brought a previously announced break from hiking to a close. Minutes from the bank’s last policy committee meeting, however, revealed that it was a more nuanced decision than previously expected.
‘AUD/USD fell close to 0.8 per cent to 0.6810 because of dropping commodity prices and a set of dovish signals from the Reserve Bank of Australia’s early June meeting,’ said an analyst note from Commonwealth Bank of Australia’s forex strategy unit. ‘The GBPAUD exchange rate got a similar lift, rising to 1.8793 after the minutes were released.’
Another analysis from ANZ said investors were not interpreting the RBA's June board meeting minutes as especially hawkish.
‘The argument for lifting the cash rate another 25 basis points centered on the heightened risk that inflation might take longer than had been expected to settle down to target’.
The RBA’s board noted that ‘inflation is already expected to stay north of target for a number of years, meaning Australia will need somewhat longer to return to target than some other countries.’
The decision to raise interest rates came as a surprise to forex traders expecting the central bank to stay on pause and the Australian Dollar rallied on the news of the 25bp hike. The Australian Dollar’s rise brought a period of underperformance to a close.
ANZ noted that it also confirmed that the foreign exchange market is still very focused on the evolution of interest rates.
In late February 2023, the Aussie was holding firm as the best performing G10 major for the year-to-date, despite gains by many of its peer currencies for a second successive session.
On Tuesday, 20th February, GBP/AUD reversed all the previous week's losses and neared a 200-day moving average of 1.7544. Analysts at the Commonwealth Bank of Australia (CBA) said the pair could potentially reach as high as 1.7789 if the
Reserve Bank of Australia (RBA) said that the next expected hike to the cash rate would be the last in the current cycle, which they did.
‘AUD/GBP might test downside support at 0.5619 by mid-week if traders wind back their expectations for additional tightening,’ wrote Commonwealth Bank of Australia’s forex strategy unit in a Monday analyst note.
‘We believe AUD/GBP is trading near fair value and we’re looking for the pair to hover around the current level for most of this year.’