Time to Buy the Aussie Dollar?

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The Australian dollar has been weak, but this strategist thinks the tide is turning.

It's been easy to hate the Australian dollar lately. China's slowing growth, falling commodity prices, and a central bank interest rate cut have all weighed on the down-under currency.

Sue Trinh, a currency strategist at RBC Capital Markets. has been one of the Aussie bears - but she is changing her tune: "We now have a more constructive view on AUD, " she wrote in a note to clients.

Trinh argues that investor positioning on the New Zealand dollar and the Aussie point to possible upward momentum for the Australian currency. Also, she says, a look at derivatives that reflect expectations for the Aussie shows them "in overshoot territory, " pricing in another 100 basis points in rate cuts.

"With so much negative news already in the price, we see downside in AUD limited from current levels, " Trinh says.

Forecasts for growth in China have also gone too negative, Trinh argues, and if the economy actually beats those expectations it will be a plus for the Aussie.

As for trading the Aussie right now, Trinh warns that buying it against the dollar "may be a risky proposition" given the currency's relative volatility. Instead, she recommends buying the Aussie against the kiwi. That removes any risk from U.S. equity performance, she says, and "the AUD market is more overpriced for rate cuts than the NZ market, in our view."

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