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The Australian Dollar has endured a dour start to 2024, but this could still be a year of outperformance for the currency, according to a strategy update from UBS.
"While we acknowledge that risks to our constructive AUD view have increased, we still see compelling domestic reasons for AUD resilience," says Vassili Serebriakov, Strategist at UBS.
The call comes in the wake of the Reserve Bank of Australia's first policy meeting of the year, where it said that returning inflation to target remained the "highest priority" and that further hikes cannot be ruled out.
"While we think that additional tightening is very unlikely at this stage, the tone of Governor Bullock's press conference was somewhat hawkish, which should be seen as AUD-supportive in the context of the RBA needing to reaffirm some of its inflation-fighting credentials," says Serebriakov.
Markets always expected interest rates to remain unchanged but saw the potential for the RBA to drop the reference to the need for further rate hikes. Maintaining this stance in the February statement made this latest guidance something of a 'hawkish' surprise for financial markets.
Despite the guidance, the AUD has been unable to stage any meaningful comeback, suggesting the market continues to look through the hawkish words and still sees a central bank with strong dovish instincts.
To date, the Australian dollar is down 5% against the U.S. Dollar in 2024, the Pound to Australian Dollar is 4.40% higher, and the Euro to Australian Dollar is up some 2.75%.
UBS economists continue to expect the first cut to be delivered in August, which would put the RBA close to other central banks starting their own rate cutting cycle.
"The risks are for a later start however and in any case the pace is likely to be a very gradual 25bp per quarter in our view," says Serebriakov.
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On balance, if the RBA were to trail other central banks the Australian Dollar could find support via widening interest rate spreads in its favour.
UBS currency strategists note the domestic picture shows the Australian economy continues to benefit from robust public spending, strong population growth and tax cuts.
Business investment has picked up as well, notes Serebriakov, saying historically this has been a good guide to AUD cycles.
"Long AUD remains also somewhat of a value proposition: broader commodity prices have been resilient despite a still uninspiring China backdrop and AUD TWI continues to trade slightly below FV in our replication of the RBA model with realised terms-of-trade," says Serebriakov.
UBS strategists maintain long AUD/USD and AUD/EUR positions.