Australian Dollar Tipped to See "Modest" Strength This Year "At Best"

Image © Adobe Stock

HSBC analysts say the Australian Dollar will lack support from commodities, China and interest rates for the remainder of the year.

In an extensive research briefing, HSBC finds the recent rise in the Australian Dollar has mostly reflected its "beta" to moves in the broad USD and risk appetite.

The Aussie Dollar was one of the best-performing G10 currencies in the March to May period. But HSBC thinks the outperformance resulted from its "beta", i.e. its positive correlation to buoyant risk sentiment.

This means periods of Australian Dollar strength have typically resulted from rising global stock markets, confirming the importance of the global backdrop for the currency.

This is expected to be the case for the coming months, meaning the Aussie will struggle if global investor sentiment deteriorates.

And what of China? The rule of thumb for the past decade has been that the Australian Dollar will benefit when commodity prices rise, thanks mainly to Chinese demand, but HSBC finds "AUD-specific drivers have not yet turned sustainably supportive."

China - the engine of growth for Australian raw material exports - continues to see its property market struggle, and "steel demand faces a fragile balance and may not improve soon".

In fact, HSBC warns that any weakness in the Chinese Renminbi "could cause more material damage to the AUD".

Regarding the Reserve Bank of Australia (RBA), "rate differentials are not particularly supportive."

The RBA is expected to be one of the last of the central banks to cut interest rates, which has provided the Australian Dollar with some impetus in the March to May period.

But HSBC says, "the AUD does not stand out as a good candidate for carry trades". The carry trade refers to when investors borrow in low interest rate currencies and invest in higher interest rate currencies. But the RBA's base rate is actually set below those of other central banks, such as the Federal Reserve and Bank of England.

Indeed, HSBC reckons the GBP stands out as a better "carry" candidate than AUD.

"There may only be modest AUD strength this year at best," says HSBC.