We Still Like the Australian Dollar, Says JP Morgan

Image © Adobe Stock

JP Morgan isn't ready to drop its backing for the Australian Dollar in 2024, saying the currency remains a favourite bet.

It's been a dour start to 2024 for the Australian Dollar - which is one of the G10's underperformers - but "stay long AUD," is the message from the Wall Street investment bank.

"While price action has admittedly disappointed thus far into 2024, we remain constructive on AUD within the G10 high-beta bloc on relative cyclicals," says Patrick R Locke, an analyst at JP Morgan.

AUD screens as the third-worst performer in G10 FX since the start of the year and JP Morgan says this likely reflects ongoing concerns about China and relatively low conviction around the global growth impulse.

Underscoring the AUD's sensitivity to China is the outperformance it is delivering at the time of writing on January 23, with investors reacting favourably to rumours Chinese authorities are readying a sizeable stimulus plan to boost the country's stock market.

JP Morgan is nevertheless focussed on a supportive domestic story, saying the local inflation outlook suggests the reserve Bank of Australia will still "be live" for hikes near-term.

This would contrast to the likes of the U.S. Federal Reserve, Bank of England and European Central Bank where the talk is of the timing of interest rate cuts.

Market strategists say such divergence in policy outlook can tend to favour the currency of the central bank that is still willing to hike.

"The threshold to cut should prove higher than for other G10 central banks," says Locke. "Indeed, our economists expect the RBA will be the last DM central bank to begin cutting rates".

JP Morgan also cites a healthy fiscal position has enabled the government to follow through with previously-legislated tax cuts starting midyear, which economists estimate are worth nearly 1% of GDP.

"Fiscal policy will therefore be a tailwind for growth (and inflation), allowing the economy to sustain higher interest rates than previously," says Locke.

Seasonality meanwhile becomes more favorable for AUD over the remainder of 1Q, and Locke says this historical tailwind may be magnified this year on the back of larger-than-usual dividend flows (ie. AUD-buying) by local commodity exporters.