Buy the Aussie Dollar on Chinese Support – HSBC

According to HSBC, investors may want to consider purchasing the Australian dollar, as the currency benefits from three significant factors.

The first and likely most critical factor supporting the Aussie dollar is policy backing from China, as noted by analysts at HSBC on October 9. Optimism regarding China contributed to an increase in the AUD in late September, driven by elements such as risk appetite and Australia’s terms of trade, although the performance of AUD/USD did not fully reflect this optimism.

There are indications that markets are skeptical about whether this positive sentiment can be translated into real economic advantages, particularly an increase in steel demand. Nonetheless, recent announcements of stimulus measures are seen as impactful, with HSBC emphasizing that the true importance for the AUD lies not in the immediate scale or effectiveness of these measures, but in the coordinated policy support from fiscal and monetary authorities.

“In a context where negative news could prompt more robust policy backing, we prefer to position for a rebound in the AUD during China-related sell-offs, unless the coordinated policy support diminishes,” HSBC explained. The potential for significant gains in the AUD depends on whether these policy measures can rejuvenate China’s economy.

Secondly, an increasing trend toward easing among major central banks is expected to create more favorable global financial conditions for risky assets. This contrasts with the Reserve Bank of Australia’s (RBA) stance, which remains “restrictive-for-longer,” a viewpoint that markets may not fully embrace.

Consequently, there is potential for the AUD to receive support through both risk sentiment and relative interest rate dynamics over time.

Lastly, the Aussie dollar currently appears undervalued. “In addition to its low valuation against our China sentiment gauge, AUD/USD is also considered cheap based on our models when key drivers are taken into account,” the bank noted.

However, adopting a positive outlook on the AUD might be challenging in the near term due to risks associated with Fed policy adjustments, potential geopolitical tensions, and US election uncertainties, which could hinder the AUD’s performance against safe-haven currencies like the USD.

Instead, HSBC suggests a risk-neutral stance, favoring the AUD’s performance against other cyclical currencies that have less correlation to China’s growth, a relatively supportive central bank easing bias compared to the RBA, and a less favorable terms of trade outlook.

Thus, HSBC believes that the AUD presents an attractive buying opportunity on dips against the EUR, GBP, and NZD.