Aussie Favored vs Euro, Franc Amid Tight RBA, China Rebound

Key Takeaway

• UBS and Bank of America recommend buying the Australian dollar against the euro and Swiss franc, citing tight RBA policy and a rebound in China's economy.
• The Aussie is favored in FX trades as it outperforms most G-10 currencies, avoiding risks tied to uncertain US dollar movements.
• Expectations of ECB easing in June and subsequent cuts by other central banks contrast with RBA's delayed easing, presenting AUD buying opportunities.

Aussie Dollar's Bullish Outlook

Investors are advised to buy the Australian dollar against currencies like the euro and Swiss franc, capitalizing on a tighter Reserve Bank of Australia (RBA) policy. UBS Group AG highlights that sticky inflation will prevent the RBA from easing its policy sooner than its G-10 peers, supporting the Aussie's strength. Additionally, Bank of America points to an expected rebound in China’s economy as a further reason to favor the Australian dollar. This strategy effectively sidesteps the volatility introduced by the US dollar, which has been a significant factor in global foreign-exchange markets this year.

Relative Value Trades Gain Traction

The Australian dollar's resilience is attributed to unexpectedly strong first-quarter inflation, rising home prices, and robust labor data, which have led traders to delay expectations of RBA policy easing to next year. In contrast, data suggests that the European Central Bank, along with the Bank of England, Swiss National Bank, and Bank of Canada, may ease policy in the coming months. "With the first RBA cut not coming until February of next year, well after many other G-10 central banks, we see AUD dips as a buying opportunity, especially on the crosses," says Vassili Serebriakov, a currency and macro strategist at UBS in New York.

China's Economic Recovery: A Tailwind for the Aussie

Australia's status as the world's largest exporter of iron ore positions its currency to benefit from China's economic policies aimed at revamping infrastructure and improving local governments' capabilities. The warming ties between Australia and China further bolster the Aussie's prospects. "We see multiple tailwinds for the Australian dollar, including green shoots in the Chinese economy," notes Oliver Levingston, a currency strategist at BofA in Sydney. The bank also prefers the Aussie over the Swiss franc, anticipating the latter to become a primary funding currency for carry trades.

Short-Term Tactical Trades and Long-Term Forecasts

While the Aussie has shown strength against several currencies, Westpac Banking Corp. suggests it may underperform against the New Zealand dollar in the short term due to technical factors. Commonwealth Bank of Australia forecasts that Aussie currency crosses will soften in the upcoming months due to a weak global economy but will recover as central banks start their rate-cutting cycles and the global economic outlook improves in the second half of 2024.

Street Views

• UBS Group AG (Bullish on the Australian dollar vs. euro and Swiss franc):

  "Folks are turning to relative value trades as they are unsure of the US dollar’s path ahead... Rates differential expectations will keep Australian dollar supported against the other crosses."

• Bank of America (Bullish on the Australian dollar):

  "We see multiple tailwinds for the Australian dollar, including green shoots in the Chinese economy."

• Vassili Serebriakov, UBS in New York (Bullish on AUD dips as a buying opportunity):

  "With the first RBA cut not coming until February of next year, well after many other G-10 central banks, we see AUD dips as a buying opportunity, especially on the crosses."

• Richard Franulovich, Westpac Banking Corp. (Neutral/Bearish on AUD/NZD trade):

  "This is a short-term tactical trade, taking advantage of technically stretched state of the cross."

• Carol Kong, Commonwealth Bank of Australia (Neutral, with Long-Term Optimistic view starting second half of 2024 for major currency crosses):

  "We forecast most of the major crosses will lift from second half 2024 as central banks begin their rate cutting cycles and global economic outlook improves."