“We remain confident that a likely recovery in China later this year will lead to medium-term AUD appreciation,” BofAML’s Mr Sinha said in a note.
The bank has the local currency reaching US74¢ in the June quarter, US76¢ in the September quarter and closing out the year at US78¢. It forecasts the currency will continue to appreciate in 2020, topping US80¢ in the September quarter and then finishing the year at US81¢.
Hong Kong-based Mr Sinha wrote his note after visiting clients of the bank in Sydney, Melbourne and Brisbane including a mix of hedge funds, asset managers, local banks and corporates.
“The domestic mood music was very bearish: most expected a further drop in house prices was likely and would ultimately have broader spillovers to consumption and the labour market, both of which were swing factors for the RBA,” Mr Sinha said. “The vast majority felt the next move was more likely to be a cut than hike.”
NAB became the latest local bank to call for rate cuts, which it did on Friday. It sees a cut in July and again in November. “Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and financial stability risks have abated.”
Mr Sinha said Australian clients also were “more bearish than offshore” ones on external factors.
“A small majority felt a retraction of US tariffs against China was unlikely this year, while the positive terms of trade shock was viewed as largely supply driven. Clients questioned the sustainability and efficiency of the pickup in credit growth in China, especially in terms of spillover to commodity-intensive sectors (infrastructure and property).
“This naturally translated to predominantly bearish views on AUD;most expected US68¢to be reached before US75¢.”
Mr Sinha quoted one investor who said US75¢ “would be a gift” to sell the currency.
“However, to the extent that clients were running low FX hedges on their foreign asset portfolios, many felt it would be prudent to raise hedge ratios (buy AUD) if it ultimately fell to US68¢.”
BofAML, as its forecasts signal, currently sees the Australian dollar as “undervalued”.
“The obvious factor is the shift in the RBA’s forward guidance in February validated concerns about domestic conditions, led to further pricing of monetary easing and offset the impact of stronger external conditions,” Mr Sinha said.
“The more subtle reason is perhaps the AUD is simply not as sensitive to external risk factors as before. Indeed this is an argument we have made previously but we revisit here, particularly inthe context of China.”
“A common refrain” from the clients he met, was that “China easing would be ineffective or support growth only with a lag. This is true but the revealed preference of Chinese policymakers to ease both monetary andfiscal policythis year means the spillover to commodity intensive demand may transpire sooner than expected. This is why we believe it is crucial to focus on high-frequency measures such as port shipment and steel production data”, he said.
“So far both signal 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.”