Investing.com – News of additional Chinese stimulus measures proved a clear boost to risk assets, UBS noted, and has provided yet another reason to remain long in the Australian dollar.
At 07:55 ET (11:55 GMT), it fell 0.3% to 0.6872 and was lower on Wednesday, but the pair is still almost 2% higher following the US Federal Reserve’s announcement that the interest rate cutting cycle would begin with an interest rate reduction of 50%. basis point reduction.
fell 0.4% to 1.6288, down almost 1% over the past week.
“The market continues to cling to the view that further Fed rate cuts of 50 basis points are likely this year, despite the Fed’s SEP. [Summary of Economic Projections] I make no basis for that,” UBS analysts said in a note.
“This is in stark contrast to the rest of the G10, where interest rate cuts are expected to be more cautious (e.g. in the Eurozone and Britain) or delayed (e.g. Australia) or not expected at all (e.g. Japan).”
Until now, UBS’s forecasts, such as the AUD/USD 0.7000 target for end-2024, had not included upside expectations from China, but were instead based more on the resilience of domestic Australian yields given the relatively high inflation and the recent budget stimulus.
As such, the surprise announcement of a monetary package aimed at supporting both real estate and equity markets in China provides an additional upside opportunity by encouraging divergence sentiment.
“We do not dispute the general assertion that to truly move China’s markets and economy onto a better trajectory in a sustainable manner will likely also require a fiscal package,” UBS said. “But what is more important from our near-term perspective is simply that the market has been so uniformly bearish on China’s prospects that a tactical rally in Chinese assets and related commodities such as iron ore could be very helpful for the G10 beta currencies .”
In the case of the AUD, UBS has found that investors are reluctant to own the currency as they believe it cannot sustainably recover as long as a weak growth threat looms in China and commodity prices are under pressure.
“Given that the AUD resisted this stance quite easily when the news flow went this way, the upside potential could be even greater than our target if the Chinese stimulus story moves beyond the abandonment of shorts and instead establishes some persistence and more gathers followers,” UBS added.
The bank expects the AUD to continue to outperform on the crosses, “now that our original EUR/AUD target of 1.62 is close and our year-end call of 1.60 is not a problem at all.”
