Goldman Sachs on the Australia dollar, in a report titled “AUD: Working hard, hardly working”. GS analysts say it should be a lot higher than it is.
GS says AUD is (or least has long been) a ‘high beta” currency, that is its tends to rise with ‘risk’, such as global equity markets, and fall if risk falls. But note that while the S&P 500 (GS use this as a proxy for global equity sentiment) is soaring, hitting record highs, AUD is languishing.
“With recent AUD weakness in the face of record S&P highs, AUD’s equity beta hardly seems to be “working.” Since the start of the year, we have seen AUD underperformance relative to our BEER model implied returns”
GS point the finger of blame at:
- global currencies mean reversion from the trends of late 2023 – FX that did well in the final few weeks of 2023 are 2024’s laggards
- “China growth expectations have had a noticeable imprint on EM FX returns lately, and it looks like that is also true for AUD. The correlation between Chinese equity performance and AUD returns has increased since the start of the year”
- “Chinese equity underperformance helps explain a meaningful portion of the residual between predicted and actual AUD performance in January”
While Chinese stocks have bounced going into the Lunar new Year holiday, with the cumulative impact of piecemeal government intervention steps to support the market. But, looking ahead:
- “We expect that persistently weak Chinese activity and depressed sentiment will continue to counterbalance this policy convergence story and AUD’s typical equity beta, keeping AUD somewhat under pressure for now”
ps. coming up later from Australia (China is on holidays today):