Australian Dollar Should be Much Higher Says Goldman Sachs

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The Australian Dollar should be stronger but has been weighed down by two factors says Goldman Sachs.

In a recent currency research note, analysts at the Wall Street bank say global financial conditions have eased year-to-date, led by rising equity prices, which is a typically AUD-friendly backdrop.

“Positive growth repricing typically benefits pro-cyclical currencies, but that typical strength has not materialised this year,” note FX analysts at Goldman Sachs.

The bank’s research shows that negative sentiment on China has weighed on AUD in recent months, “and this still seems to be the case”.

Researchers find the correlation between Chinese equity performance and AUD returns remains elevated and continues to explain a meaningful portion of AUD performance.

But there is a second issue at play: “AUD is now also underperforming its beta to US equities, similar to NOK. Both of these factors have kept AUD under pressure, despite the favourable pro-cyclical environment,” says Goldman Sachs.

In addition, monetary policy now seems like a less relevant driver of currency performance.

The RBA shifted to a neutral policy stance in March, “placing itself more squarely in the middle of the pack of G10 central banks,” says Goldman Sachs.

“Under ordinary circumstances, we would expect to see AUD outperforming, but with its usual beta to equities unusually depressed and China worries still top of mind with investors, it may take some time before AUD starts to react in line with historical performance,” says Goldman Sachs.