(Bloomberg) — Investors should buy the Australian dollar versus currencies like euro and Swiss franc, a strategy that benefits from a tighter Reserve Bank policy and minimizes risks associated with the greenback.
That’s the view of UBS Group AG, which says the Aussie will rally against these exchange rates as sticky inflation keeps the RBA from loosening its policy sooner than other Group-of-10 peers. Bank of America says an expected rebound in China’s economy is another reason to buy the Australian dollar versus other currencies.
These trades put Aussie bulls in a sweet spot as they nearly remove the biggest wild card that’s been whipsawing global foreign-exchange markets this year — the US dollar. While the Australian currency along with most of its G-10 peers has weakened against the greenback of late, it’s up versus nearly all other major exchange rates tracked by Bloomberg this quarter.
“Folks are turning to relative value trades as they are unsure of the US dollar’s path ahead,” said Alex Loo, a macro strategist at Toronto-Dominion Bank in Singapore. “Rates differential expectations will keep Australian dollar supported against the other crosses.”
The Aussie’s fortunes diverged from other G-10 currencies as unexpectedly strong first-quarter inflation, rising home prices and resilient labor data prompted traders to push back RBA easing bets to next year, according to data compiled by Bloomberg.
Meanwhile, expectations are growing the European Central Bank will ease policy in June, with the Bank of England, Swiss National Bank and Bank of Canada following in subsequent months, the data show.
“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,” said Vassili Serebriakov, a currency and macro strategist at UBS in New York City.
China Tailwind
Australia’s status as the world’s biggest exporter of iron ore is also helping its currency. The commodity posted double-digit gains this quarter as Chinese policy makers vowed to help local governments revamp run-down buildings and upgrade infrastructure. Warming ties between the two nations are another plus.
“We see multiple tailwinds for the Australian dollar, including green shoots in the Chinese economy,” said Oliver Levingston, a currency strategist at BofA in Sydney. The bank also favors the Aussie over Swiss franc, on expectation the latter will become the chief funding currency for carry trades after suspected intervention by Japanese officials to support the yen, he said.
Read More: Carry Trades Wobble as Yen Swings Roil One of Year’s Best Bets
Stretched Trade
The Aussie may be close to unwinding its advance against some currencies. Westpac Banking Corp. recommends betting the Aussie will underperform the New Zealand dollar after the currency pair hit an 11-month high this week.
“This is a short-term tactical trade, taking advantage of the technically stretched state of the cross,” said Richard Franulovich, head of currency strategy at the bank.
Commonwealth Bank of Australia expects Aussie currency crosses to remain soft in the next few months due to a weak global economy, before recovering. “We forecast most of the major crosses will lift from the second half of 2024 as central banks begin their rate cutting cycles and the global economic outlook improves,” said Carol Kong, a currency strategist at the bank.
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