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FX: Miles to go before the AUD can sleep easy

Even the relative strength of the Australian economy is not enough to convince FX analysts that now is a good time to increase exposure to AUD.

Australia Map
Photo: iStock

Should you be bullish or bearish on the Australian dollar? The country faces many of the same inflationary and interest rate headaches as the rest of the world, but also benefits from churning out many of the raw materials that others are now paying so much to get hold of. In recent months the Aussie dollar has weakened against the US dollar – surprisingly so, in some eyes. But it is also more vulnerable than some to any signs of China weakness.

In a research note last week, analysts at JPMorgan remained constructive on the AUD, saying that economic indicators mitigate the risk of the central bank having to overtighten, while the country’s commodity exporter status also provides natural insulation from stagflationary forces.

John Bromhead, ANZ Bank

Some see that status as one of the reasons why the AUD looks undervalued.

“Over the medium term, fundamentals such as differentials in the terms of trade and interest rates are the primary drivers of the currency,” says John Bromhead, ANZ Bank FX strategist.

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