Don't Give Up on AUD Yet: Crédit Agricole

Image © Adobe Images

The Australian Dollar can still appreciate by approximately ten per cent in 2024, according to new research.

David Forrester, Senior FX Strategist at investment bank Crédit Agricole, says the Australian Dollar might have experienced a rocky start to the year, but the tide will turn.

The analyst looks for the exchange rate to move higher over the coming months as "investor pessimism towards China’s economy could be nearing a peak given recent efforts by policymakers to stabilise sentiment."

Foster says one reason AUD has underperformed in 2024 is that iron ore prices have dropped, with evidence pointing to slumping Chinese steel output being behind the move.

Any China recovery can therefore help Australia's primary foreign exchange earner.

The Reserve Bank of Australia (RBA) is meanwhile expected to lag the Fed in cutting rates as U.S. core inflation is receding faster than Australia's, "this will allow the Fed to cut rates sooner and by more than the RBA," says Forester.

The closing rate differential will offer the Aussie Dollar an improved 'carry' profile. (What's the carry trade?).

Fiscal policy in Australia is also expected to become supportive, with the government announcing changes to the Stage 3 income tax cuts on Thursday, first announced in 2019.

When the cuts are finally rolled out on July 01, those in lower tax brackets will see a greater cut.

Crédit Agricole says these relief measures mean fiscal policy is providing more of a boost to the economy than previously assumed by the RBA.

All else being equal, this would be consistent with a later start date for any Australian rate cut cycle.

Crédit Agricole holds AUD/USD forecasts of 0.68 and 0.72 for Q1 and Q4.

Track AUD with your own custom rate alerts. Set Up Here

Despite 2024's poor start, the Australian Dollar is better bid this week, thanks to Chinese authorities announcing plans to boost the domestic stock market.

"The Chinese authorities have just delivered a major rescue package to the stock market. If it succeeds in restoring investors' confidence, Chinese stocks could eventually rescue the Australian dollar," says Kit Juckes, head of FX research at Société Générale.

Chinese Premier Li Qiang has asked authorities to draw up "forceful" measures to halt sliding share prices and improve investor sentiment. The moves by Chinese authorities come after China's benchmark CSI 300 Index lost a fifth of its value in the last nine months and hit its lowest level since the start of 2019 on Monday.

The news helped Chinese equities recover and saw the Aussie Dollar put in its best performance of the year so far, although there is a great deal more to be done if the losses of the past three weeks are to be overturned.

On Wednesday, the People's Bank of China said it will implement a 50bp RRR cut on February 5, taking the rate to 10%, in the process releasing around RMB1 trillion of long-term liquidity.

"China equities hit 5-year lows even as US stocks printed record highs. China's reported package to bolster its equity market plus a RRR cut should add background support to the Aussie," says Sean Callow, a foreign exchange strategist at Westpac.

The bank will also lower re-lending and rediscount rates by 25bp for bank lending to agriculture and small businesses and promote the steady decline of "comprehensive social financing costs".

The state-owned Securities Daily meanwhile reported that the country’s medium- to long-term investment funds, including the $406 billion National Social Security Fund and some state-owned insurance giants, are expected to buy shares to bolster the stock markets.