China’s Stimulus Strengthens Case for Staying Long on AUD – UBS

Article Overview: Chinese Stimulus Boosts Australian Dollar Outlook

Investing in risky assets has gained momentum due to news of additional stimulus measures from China, according to analysts at UBS. This development provides a solid reason for maintaining a long position in the Australian dollar (AUD).

As of 07:55 ET (11:55 GMT), the AUD/USD pair experienced a 0.3% decline to 0.6872, though it remains nearly 2% higher following the US Federal Reserve’s initiation of its rate-cutting cycle with a significant 50 basis-point reduction. Meanwhile, the EUR/AUD pair fell 0.4% to 1.6288, marking a decline of nearly 1% over the past week.

UBS analysts highlighted that the market is still firmly anticipating further 50 basis-point cuts from the Federal Reserve this year, despite the Fed’s Summary of Economic Projections not suggesting this as a baseline expectation. This stands in stark contrast to other G10 countries, where rate cuts are either expected to be more cautious (like in the euro area and the UK), delayed (as in Australia), or entirely absent (like in Japan).

Previously, UBS’s forecasts—such as an end-2024 target of 0.7000 for AUD/USD—were based mainly on the resilience of domestic Australian rates due to high inflation and recent fiscal enhancements, without factoring in potential gains from China.

However, the unexpected announcement of a monetary package aimed at supporting China’s property and equity markets presents a new upside opportunity, likely fostering a divergence sentiment in the market.

UBS noted, "While it is widely believed that a fiscal package is necessary for a sustainable improvement in China’s markets and economy, what matters more in the short term is the fact that market sentiment has been overwhelmingly negative regarding China’s prospects. This could lead to a tactical rally in Chinese assets and commodities, such as iron ore, benefiting G10 beta currencies."

In the context of the AUD, UBS has observed a hesitance among investors to own the currency, as concerns about China’s weak growth and pressure on commodity prices persist. However, the AUD has withstood these negative sentiments effectively. If the situation regarding China’s stimulus develops beyond merely liquidating short positions and instead becomes more favorable and persistent, the potential upside for the AUD could exceed existing targets.

UBS anticipates that the AUD will continue to surpass performance expectations against other currencies. Their initial target for EUR/AUD of 1.62 is nearing fruition, and their year-end call of 1.60 appears increasingly attainable.