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Experts Turn Bullish on Australian Dollar

The Australian dollar is saying “no” to the 70 US cents level as it rallies on Thursday along with Chinese stock markets. The Aussie also continues to appreciate from long-term lows against the pound and euro, and is undervalued against the New Zealand dollar, argues Westpac.

Posted Oct 25, 2018

Many analysts have gone on record within the past month predicting the Australian dollar at $0.70, but the currency continues to display resilience in the face of numerous factors against it.

With most eyes on the ECB and the euro on Thursday, the Australian dollar has gone quietly about its business. A climb to $0.71, from the mid-$70s, arguably forms a bullish technical pattern that analysts call a double bottom, given the push away from similar levels earlier in the month.

The Australian dollar’s strength has been attributed to a turn in Chinese equity markets. Aussie traders are using stock prices to gauge Chinese economic health, which remains vital to Australia given the massive commodity trade between the two countries.

Chinese stocks, as measured by the Shanghai Composite Index (SCI), have had a shocker this year, and were down 26 percent year-to-date by October-19. The past week’s 6 percent gain in the SCI therefore acts as a buoy for Australian exchange rates at a time when little else will.

For one of Australia’s largest banks, Westpac, the time for betting against the Australian dollar is over, at least in the short term.

“Our [quantitative FX] model finally quits its AUD short position”; it now offers a “strengthening growth signal in the wake of last week’s sharp fall in the unemployment rate from 5.3 percent to 5.0 percent,” says Westpac’s Richard Franulovich.

Westpac also report that the Aussie is undervalued relative to the New Zealand dollar. This week’s 0.7 percent rise against the kiwi from N$1.076 to N$1.084 is justified, the bank believes, based on relative commodity prices, which “trend firmly in the Aussie’s favour.” While the prices of dairy goods, widely exported by New Zealand, continue to weaken, the prices of commodities important to Australia, like coal and iron ore, climb.

“These trends leave our estimate of AUD/NZD short-term fair value around 1.11,” Westpac write—2.4 percent higher than today’s market rate.

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