Buy the Australian dollar on Chinese support

Investing.com – Investors should look to buy the Australian dollar, according to HSBC, as the currency enjoys three key headwinds.

The first, and perhaps most important, factor likely to support the dollar is policy support from China, analysts at HSBC said in an Oct. 9 note.

Optimism in China helped lift the AUD in late September through the financial market channel (ie risk appetite, Australia’s trade conditions and interest rate outlook to a lesser extent), HSBC said, but AUD/USD’s performance was far below the level of this optimism. .

Markets appear to be questioning whether the positive sentiment can be matched by real economic benefits, most importantly higher demand for steel.

That said, recent stimulus announcements have been significant and we believe what matters most for the AUD is not the immediate size or effectiveness of policy measures, but coordinated policy put between fiscal and monetary authorities, the bank added.

“In an environment where bad news could bring stronger political support, we prefer to position the AUD to recover from the China-related sell-off, unless ‘politics’ fades,” HSBC said.

“The eventual size of the AUD’s rise depends on whether policy measures can reinvigorate China’s economy.”

Second, there is a growing easing trend among major central banks, which should see global financial conditions become more supportive of risk assets. This is also in contrast to the RBA’s “tightening for longer” stance, which may still be subscribed to by markets.

Therefore, we believe that the AUD could be supported by both risk sentiment and time relative rate channels.

Finally, the Aussie dollar just looks cheap.

“In addition to its undervaluation against our China sentiment indicator, AUD-USD also looks cheap based on our models when key factors are factored in,” the bank added.

However, trading a positive position for the AUD could be difficult in the short term. Fed repricing, potential geopolitical escalation and US election risks may dampen the AUD’s performance against safe-haven currencies, especially the USD, in the near term.

Instead, we prefer to remain relatively risk neutral and position for AUD to outperform other cyclical currencies with a lower beta of China growth; a strengthening of the central bank’s easing bias compared to the RBA; and less favorable terms of trade dynamics.

“Therefore, we believe the AUD looks attractive on the downside against the EUR, GBP and NZD,” HSBC added.