Goldman Sachs On AUD Drivers - China Equities Important In 2024

The US bank weighs in on AUD drivers, noting China equity sentiment has been an important driver since the start of the year. It expects weaker China sentiment to remain a headwind for the A$.

• Goldman Sachs: Previously, we have shown that AUD tends to be the most high-beta of the G10 currencies, with the strongest correlation to higher equity prices. However, with recent AUD weakness in the face of record S&P highs, AUD's equity beta hardly seems to be “working.” Since the start of the year, we have seen AUD underperformance relative to our BEER model implied returns. We think this is partly a correction of the moves in late December; we found the currencies which outperformed the most post the Dec FOMC have seen greater underperformance YTD. While this appears to be the main factor, we also noted that China growth expectations have had a noticeable imprint on EM FX returns lately, and it looks like that is also true for AUD. The correlation between Chinese equity performance and AUD returns has increased since the start of the year. We also find that incorporating Chinese equity returns into our standard BEER model helps explain a meaningful portion of the residual between predicted and actual AUD performance in January.
• On the central bank front, softer data, including the recent CPI print, will likely keep the RBA from sounding as hawkish next week as they were at the December meeting. We expect a softening of the hiking bias following similar adjustments by the BoC and the Fed. In some ways, the RBA, one of the more dovish central banks this cycle, has become less of an outlier as other central banks come around to a more dovish outlook. However, we expect that persistently weak Chinese activity and depressed sentiment will continue to counterbalance this policy convergence story and AUD’s typical equity beta, keeping AUD somewhat under pressure for now.