By Investing.com – The news of additional Chinese stimulus proved a clear fillip for risky assets, noted UBS, and has provided an additional reason to maintain a long position in the Australian dollar.
At 07:55 ET (11:55 GMT), AUD/USD fell 0.3% to 0.6872, drifting lower Wednesday, but the pair is still close to 2% higher following the US Federal Reserve’s announcement of a start to its rate-cutting cycle with a 50 basis-point reduction.
EUR/AUD fell 0.4% to 1.6288, down close to 1% over the course of the last week.
“The market continues to stick tight to the idea that further 50bp Fed cuts are likely this year, despite the Fed’s SEP [Summary of Economic Projections] not making that a baseline,” analysts at UBS said, in a note.
“This contrasts strongly with the rest of G10 where rate cuts are expected to be more cautious (eg euro area and UK) or delayed (eg Australia) or not anticipated at all (eg Japan).”
Until now, UBS’s forecasts, such as its end-2024 AUD/USD 0.7000 target, had incorporated no upside expectations from China, and were instead based more on domestic Australian rates resilience given relatively high inflation and the recent fiscal boost.
As such, the surprise announcement of a monetary package designed to support both property and equity markets in China presents an extra upside opportunity by encouraging divergence sentiment.
“We don’t dispute the common assertion that to really move China’s markets and economy sustainably towards a better trajectory a fiscal package is also likely to be needed,” UBS added. “But, from our perspective, what matters more near term 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 can be very helpful for the G10 beta currencies.”
In the case of AUD, UBS has noted a reluctance to own the currency from investors who feel it cannot rally sustainably as long as a weak China growth threat looms and commodity prices are under pressure.
“Given AUD resisted this view pretty easily when the news flow was in this direction, the upside could be higher even beyond our target if the China stimulus story goes beyond stopping out shorts and instead establishes some persistence and gathers more followers,” UBS added.
The bank expects AUD to continue to outperform on the crosses, “with our original EUR/AUD target of 1.62 now close and our year-end call of 1.60 not a stretch at all.”