Australian dollar shows potential for appreciation in the second half of 2024: multiple factors support a rebound opportunity

China’s economic recovery has become a key driver supporting the appreciation of the Australian dollar. Bank of America pointed out that as Chinese authorities increase investments in old building renovations and infrastructure upgrades, demand for iron ore remains strong, achieving double-digit gains this quarter. As the world’s largest iron ore exporter, Australia benefits greatly, and the Australian dollar has received strong support as a result. At the same time, improved relations between the two countries further add positive factors.

Interest Rate Differentials Create Arbitrage Opportunities

The Reserve Bank of Australia’s relatively hawkish policy stance is the main reason for the Australian dollar’s appreciation against other major currencies. UBS Group noted that persistent inflation pressures have delayed the RBA’s rate cuts compared to other central banks in the G10. The expectation is that the RBA will not cut rates until February next year, while the European Central Bank, Bank of England, Swiss National Bank, and Bank of Canada are expected to start rate cut cycles from June this year and in the following months.

This policy timing difference directly drives exchange rate movements. Vassili Serebriakov, a macro strategist at UBS, stated, “Due to the extended tightening cycle of the RBA, we see the AUD as a good buy during periods of decline, especially in cross currency pairs.” Alex Loo, a macro strategist at TD Bank in Toronto, added that uncertain dollar prospects are prompting investors to shift toward relative value trades, and that interest rate differentials are expected to continue supporting the AUD against other cross currencies.

Strategic Buying of AUD Against Specific Currencies

UBS recommends investors buy AUD against currencies such as EUR and CHF, which can minimize exposure to dollar-related risks. The situation of being “locked in” with the AUD may ease due to the advantage of interest rate differentials. Oliver Levingston, a currency strategist at Bank of America, said, “The AUD faces multiple positive factors, with China’s economic recovery being the most significant.” The bank is relatively optimistic about the AUD rather than the Swiss franc, as the CHF is expected to become the main currency for carry trade financing.

Balancing Risks and Opportunities

Although the recent exchange rates of the AUD and most G10 currencies against the USD have weakened, the AUD has risen against other major currencies contrary to the trend. This reflects a market focus on relative value differences rather than absolute USD movements. Strong inflation data, rising housing prices, and a resilient labor market also reinforce the RBA’s hawkish stance, further extending the policy cycle gap.

Against this backdrop, the potential for the AUD to appreciate is gradually emerging. For investors seeking to hedge against USD risk while gaining from exchange rate movements, the AUD may become a noteworthy allocation in the second half of 2024.