China’s stimulus adds to the reasons to stay long in the AUD

Investing.com – News of additional Chinese stimulus proved a clear boost for risk assets, UBS noted, and provided further reason to maintain a long position in the Australian dollar.

At 07:55 ET (11:55 GMT), it was down 0.3% to 0.6872, having dipped on Wednesday, but the pair is still nearly 2% higher after the US Federal Reserve’s announcement of the start of its tapering cycle of rates of 50. basis point reduction.

fell 0.4% to 1.6288, down nearly 1% over the past week.

“The market continues to remain tight-lipped on the idea that another 50 basis point Fed cuts are likely this year, despite the Fed’s SEP (Summary of Economic Projections) not making that a basis,” said analysts at UBS in a note.

“This contrasts sharply with the rest of the G10, where interest rate cuts are expected to be more cautious (e.g. the eurozone and the UK) or delayed (e.g. Australia) or not anticipated at all (e.g. Japan).”

Until now, UBS’s forecasts, such as the 0.7000 AUD/USD target for the end of 2024, have not incorporated positive expectations from China and have instead relied more on resilience in Australian domestic rates, given relatively high inflation and the recent fiscal stimulus.

As such, the surprise announcement of a monetary package designed to support both China’s housing and equity markets presents an additional opportunity for growth by encouraging divergent sentiment.

“We do not dispute the common view that to truly move China’s markets and economy sustainably to a better trajectory, a fiscal package is also likely to be needed,” UBS added. “But from our perspective, what matters more in the short term is simply that the market has been so flat on China’s outlook that a tactical rally in Chinese assets and related commodities, such as iron ore, can be very helpful for G10 beta coins.”

In the case of the AUD, UBS noted a reluctance to hold the currency from investors who believe it cannot recover sustainably as long as a weak China growth threat looms and commodity prices are under pressure.

“Given that the AUD has resisted this view quite easily when the news flow has been in this direction, the upside could be higher even beyond our target if the China stimulus story overcomes short-stopping and instead , establishes some persistence and gathers more followers,” UBS added.

The bank expects the AUD to continue to outperform crosses, “with our initial EUR/AUD target of 1.62 now close and our year-end call of 1.60 not a stretch at all”.