Improving prospects for China and reduced odds of a eurozone break-up are positive for the Australian dollar, argues BCA Research, one of the world’s leading independent providers of global investment research.
Commodities and the Australian dollar have closely followed China’s business cycle during the past two decades or so, say Harvinder Kalirai, chief strategist at BCA.
“If we are correct and Chinese growth is on an upswing, it will directly benefit the Australian economy through the export sector,” he says.
Commodities and AUD closely follow China's business cycle
Source: BCA Research
Meanwhile, in response to the Reserve Bank of Australia’s (RBA) aggressive easing, there are signs that domestic demand might be reviving, according to Kalirai.
The RBA has taken its policy rate back down to the record lows that prevailed during the global financial crisis.
“Currently, external and domestic Australian economic conditions are nowhere near as bad as 2008/09,” says Kalirai.
During the crisis years, commodity prices and global trade were in a freefall and Australian banks were starved of liquidity as interbank lending dried up.
“Housing and consumer spending rebounded smartly following the RBA’s 2008/09 easing campaign and a similar recovery may be unfolding once again,” says Kalirai.
He warns that a short-term spike in risk aversion, driven by US political brinkmanship that temporarily weighs on growth-sensitive currencies, should not be ruled out.
“Nonetheless, an improving Chinese economy and falling odds of a euro break-up warrant a modest increase in risk exposure in our FX strategy via a long AUDUSD position,” concludes Kalirai.