Investing.com – Investors should look to buy the Australian dollar, according to HSBC, as the currency has three crucial tailwinds.
The first, and perhaps most important, factor likely to support the dollar is policy support from China, HSBC analysts said in a note dated October 9.
Chinese optimism helped lift the Australian dollar in late September via the financial market channel (i.e. risk appetite, Australian trade terms, and to a lesser extent interest rate expectations), HSBC said, but the AUD/USD pair underperformed significantly. Match that optimism. .
Markets appear to be casting doubt on whether this positive sentiment can be offset by real economic benefits, most importantly higher demand for steel.
However, the recent stimulus announcements have been significant, and we believe what matters most for the Australian dollar is not the immediate size or effectiveness of policy measures, but a coordinated “policy setting” across fiscal and monetary authorities, the bank added.
“In an environment where bad news can bring stronger political support, we would prefer the Australian dollar to rebound on the China-related sell-off, unless the ‘policy policy’ fades,” HSBC said.
“The ultimate size of the Australian dollar’s upside depends on whether policy measures are able to revitalize the Chinese economy.”
Second, there is an increasing tendency to ease among major central banks, which should see global financial conditions become more supportive of risk assets. This also contrasts with the RBA’s “longer restraint” stance, which may still have less support from markets.
Therefore, we believe the Australian dollar can be supported via risk sentiment and relative interest rate channels over time.
Finally, the Australian dollar simply looks cheap.
“Besides depreciating against our measure of sentiment in China, the AUD/USD is also showing cheap rates based on our models, when key drivers are taken into account,” the bank added.
However, trading with a positive stance on the Australian dollar may be difficult in the near term. Fed repricing, potential geopolitical escalation, and US election risks could weaken the performance of the Australian dollar against safe haven currencies, especially the US dollar, in the near term.
Instead, we prefer to remain relatively risk neutral and be in a position to outperform the Australian dollar against other cyclical currencies with a lower growth beta in China. strengthening the central bank’s accommodative bias compared to the Reserve Bank of Australia; and less favorable terms of trade dynamics.
“Therefore, we believe the Australian dollar looks attractive on declines against the euro, British pound and New Zealand dollar,” HSBC added.