Published: October 16th, 2024
In a market analysis published this week, UBS currency strategists were bullish on the Aussie, citing a recent bounce in commodity prices on the back of Beijing’s widely expected new economic stimulus package.
Anticipation around the stimulus, they wrote, looks to have ‘moved the dial on speculative positions, flipping them long on AUD’. The bank noted that superannuation funds have also been buying up Australian Dollars ‘as evidenced by recent uplift in their equity forex hedge ratios.’
Aussie valuations are now expected to be more attractive to forex traders than at the start of the October when AUD was at higher levels and the Greenback was showing weakness.
UBS analysts say traders who still think the bigger cycle of AUD strength and USD weakness is likely to persist can take advantage of more attractive entry points to gain exposure to the trade.
The bank did caution, however, that markets are entering a potentially febrile period with America’s presidential election just four weeks away.
Forex market metrics indicate a growing consensus for a sharp rise in volatility as the vote nears, UBS says, given that the outcome of the national poll is too close to call.
‘We believe the period ahead of voting day will see a rise in short-term tactical trading. Any new persistent trends will remain on hold unless polling results begin pointing to a clear winner’
That uncertainty could deliver near-term headwinds for the Aussie while also potentially strengthening the Greenback.
AUD losses could be limited, however, if China's State Council Information Office (SCIO) announces a fresh fiscal stimulus package this Saturday, as Beijing-watchers now anticipate.
UBS’s bullish take bellies AUD’s shaky start to 2024, when it was the wort performing G10 major.
In late 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 labour 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 labour 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 can be partly explained by seasonal shifts, a pattern that has featured before in Australian labour market data. Westpac says 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 a further 25 basis points in late June 2023 and brought a previously announced break from hiking to a close. Minutes from the bank’s 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.
On Tuesday, 20th February, GBP/AUD reversed 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.
