Bank of America Merrill Lynch Research discusses AUD outlook and considers the broader question of whether AUD is a high beta currency (highly sensitive to global risk) and more specifically whether China still matters for its direction. BofAML argues that AUD is not high-beta currency but China-specific risk still matters.
"There are many reasons for AUD's low beta to global risk than previously, but perhaps the most important is that it has not been a carry currency for some time....As a consequence, Chart-5 shows that the sensitivity of AUD to global risk (as measured by our Global Financial Stress Index) has for the most part been low. 2015-16 stands out as an exception, but that is primarily because China was driving swings in global risk over that period. This is crucial - in fact, if we look at the partial sensitivities to country-specific risk factors, the message is clear: China sentiment still matters for AUD, but US and Europe-driven swings in risk do not," BofAML argues.
"With China recently signaling more easing to come, watching high frequency indicators of its import impulse for Australia will be important. So far commodity shipment and steel production data paint a neutral impulse, which suggests the bearish domestic narrative will continue to dominate near term. However, a likely recovery in Chinese growth later this year keeps us comfortable with projecting medium-term AUD appreciation," BofAML adds.