The Australian dollar may be at a five-month low as China’s growth slowed and lower interest rates reduced the appeal of the currency, but Aussie bulls aren’t ready to throw in the towel just yet.
According to Andrew Freris, BNP Paribas Chief Investment Advisor for Asia, the currencyis “significantly oversold” and is still the best currency to own among all the Group of 20 nations.
“I’m really genuinely upset it’s hitting one (to one with the U.S. dollar),” Andrew Freris, BNP Paribas Chief Investment Advisor for Asia, told CNBC Asia’s “Squawk Box”.
“Whatever happens, even if the Reserve Bank of Australia (RBA) cuts again another 50 basis points, the Aussie is the only G20 currency that would still give you nearly 3 and a half percent overnight.”
Australia’s interest rates currently stand at 3.75 percent, which gives a more attractive return than rates in other major economies. Benchmark interest ratesin the U.S. are at the zero to 0.25 percent range, and rates in Britain and the euro zone are at 0.5 percent and 1 percent respectively.
The Aussie dollar has taken a hit in recent months as economic growth in China, its biggest trading partner, slowed. The currency has fallen nearly 7 percent from a 2012 high of $1.0813 on March 1 against the U.S. dollar, and was trading at $1.0065 at 11:30 a.m Singapore time (3:15 GMT) on Friday, its weakest in five months. The Aussie took a further hit on Thursday after trade data from China showed imports rising just 0.3 percent in April from a year earlier, compared to the forecast of 11 percent. China buys the bulk of Australia’s natural resources such as iron ore and copper.
Expectations of lower interest rates have also hurt the currency. The RBA surprised markets with a 50 basis point rate cut in early May, double the markets’ consensus. Analysts are expecting another 100 basis point cut before the end of the year.
But Todd Elmer, Citi’s Currency Strategist and an Aussie bull, says markets have already priced in lower interest rates in Australia, adding that it’s really the “deterioration” of the global economy that’s spooking investors.
Still, he is expecting a “more benign global backdrop” in the coming months, which should support the Aussie. He has a forecast of $1.20 for the currency.
“We think that fears of a harder landing in China are overplayed. We think the U.S. policy is going to remain accommodative. These are the factors that really drive the Aussie. I think they're eventually going to push through to cyclical highs,” Elmer said.
Even if the external environment does take a turn for the worse, Elmer says the rate differentials will still be in Australia's favor, as it won’t be just the RBA lowering rates.
“If China does slow down more sharply, or if Europe really disintegrated, then all global central banks are going to be cutting rates, it's not just going to be the RBA. And the risks aren't as asymmetric as the market tends to treat them,” he said.