BofA says use Aussie dollar to hedge global trade risks

BOFA SAYS USE AUSSIE DOLLAR TO HEDGE GLOBAL TRADE RISKS

Investors that are worried about rising geopolitical and trade risks should bet against the Australian dollar as a hedge, as the currency is the most exposed to global factors among U.S. dollar currency pairs, according to Bank of America.

Analysts including Vadim Iaralov note that the Aussie is the most sensitive to global equities among the G10 currencies, and its sensitivity to stocks is attractive relative to its implied volatility. “AUDUSD has shown the largest dependence on global factors among USD pairs with sensitivities rising in crisis, unlike most other pairs.”

Indeed, since COVID the beta of the AUD/USD currency pair to global equities has risen above that of AUD/JPY. And recently, its average betas to rates, equities and commodities became more elevated than in the past, Bank of America said.

“As a result, AUDUSD downside hedge could benefit from multiple risk factors coupled in a tail risk of a global trade war,” the analysts said.

Bank of America expects the Aussie to bottom at $0.62 in its base case of tariffs on China rising from 20% to 30%, before slowly rising back to $0.68 by the end of 2025. In the event of a trade war, however, the antipodean currency could drop to $0.55. It AUDUSD was at $0.644 on Thursday.

Analysts at TD Securities, meanwhile, note that while a US-China trade war is a risk to the Aussie given China’s role as Australia’s largest trading partner, there are other local factors that could support the currency.

“Hawkish (Reserve Bank of Australia) expectations, a positive immigration boost, and bigger fiscal handouts from an upcoming general election should keep AUD better supported against the USD and outperform other G10 pairs like EUR and NZD,” they said.

(Karen Brettell)

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