Investing.com – UBS noted that news of additional Chinese stimulus has proven to be a clear boost for risk assets, providing further reason to maintain a long position in the Australian dollar.
The USD/JPY pair was down 0.3% at 0.6872 at 07:55 ET (11:55 GMT), having fallen on Wednesday, but the pair is still up around 2% after the US Federal Reserve announced the start of its interest rate-cutting cycle with a 50 basis point cut.
The pound (USD) fell 0.4% to 1.6288, down about 1% over the past week.
“The market is still clinging to the idea that the Fed is likely to cut rates by another 50 basis points this year, even though the Fed’s summary of economic projections does not make that a baseline,” UBS analysts said in a note.
“This contrasts sharply with the rest of the G10 where interest rate cuts are expected to be more cautious (e.g. euro area and UK), delayed (e.g. Australia) or not expected at all (e.g. Japan).”
So far, UBS’s forecasts, such as its AUD/USD target of 0.7000 by the end of 2024, have not included any bullish expectations from China, and have instead been based on the resilience of domestic Australian interest rates in light of relatively high inflation and the recent fiscal boost.
Accordingly, the surprise announcement of a monetary package designed to support China’s property and stock markets represents an additional bullish opportunity by encouraging divergence sentiment.
“We do not disagree with the common assertion that getting China’s markets and economy on a sustainable path to a better path is likely to require a fiscal package,” UBS added. “But in our view, what matters most in the 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 could be very beneficial for G10 beta currencies.”
In the case of the Australian dollar, UBS has noted a reluctance to own the currency from investors who feel it cannot rise sustainably as long as the threat of weak growth in China looms and commodity prices remain under pressure.
“Given that the AUD has resisted this view fairly easily when news flow has been in this direction, the upside could be even higher than our target if the Chinese stimulus story overrides the short-selling pause and instead proves to be some consistency and gathers more followers,” UBS added.
The bank expects the Australian dollar to continue to outperform its peers, “with our original target for EUR/AUD of 1.62 now approaching, and our year-end forecast of 1.60 not far off at all.”