Goldman Sachs Says AUD Underperforming Broader Risk Backdrop Amid China Headwinds

The US bank notes AUD is underperforming relative to the positive broader risk backdrop YTD. China concerns/equity weakness have been an offset, see below for more details.

Goldman Sachs: Space AUDity. Financial conditions have eased year-to-date, led lower by rising equity prices. Usually, AUD outperforms in this type of environment—positive growth repricing typically benefits pro-cyclical currencies—but that typical strength has not materialized this year. Instead the currency has unexpectedly weakened versus the Dollar. We have shown that negative sentiment on China has weighed on AUD in recent months, and this still seems to be the case. The correlation between Chinese equity performance and AUD returns remains elevated and continues to explain a meaningful portion of AUD performance. However, AUD is now also underperforming its beta to US equities, similar to NOK (see NOK bullet). Both of these factors have kept AUD under pressure, despite the favorable pro-cyclical environment. Meanwhile, monetary policy seems like a less relevant driver of currency performance. The RBA shifted to a neutral policy stance this week, placing itself more squarely in the middle of the pack of G10 central banks. Under ordinary circumstances, we would expect to see AUD outperforming, but with its usual beta to equities unusually depressed and China worries still top of mind with investors, it may take some time before AUD starts to react in line with historical performance.