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The Australian Dollar offers value at current levels according to a new analysis that follows the release of Australian inflation numbers for the third quarter and news of a looming Chinese fiscal stimulus.
"We would look to bottom-fish AUD/USD around current levels," says Elias Haddad, an analyst at Brown Brothers Harriman.
The call comes after Australia reported a slowdown in inflation, but the decline was not fast enough to bolster bets for a 2024 interest rate cut at the Reserve Bank of Australia (RBA).
Money market pricing shows there are less than 20% odds of a 25 basis point cut by December after Australia's headline CPI inflation fell to 2.8% year-on-year in the third quarter from 3.8% in the second quarter.
"I don't think we should expect the RBA to lower interest rates next week based on this data. A lot of the drop was down to energy prices," says Volkmar Baur, FX Analyst at Commerzbank.
The RBA's measure of core inflation - which is more relevant to central bank policy - matched expectations at 3.5% y/y and 0.8% quarter-on-quarter.
"This shows how the Australian labour market is still going strong, causing domestic inflation. The RBA says this is its biggest risk to achieving its inflation target," says Baur.
"Trimmed mean CPI matched consensus and supports the RBA's restrictive for longer policy stance," adds Haddad.
The Australian Dollar has been supported by expectations that the RBA will be unable to match the pace of interest rate cuts elsewhere in the world, a setup that looks unlikely to change in the near term.
"We would look to bottom-fish AUD/USD around current levels. AUD/USD has undershot the level implied by real 10-year Australia-U.S. bond yield spreads and China is expected to unveil details of its fiscal stimulus pledge next week," says Haddad.
It was reported Wednesday that China will next week the issuance of over 10 trillion yuan ($1.4 trillion) in extra debt in the next few years to revive its fragile economy.
The fiscal package is expected to be further bolstered if Donald Trump wins the U.S. election, according to Reuters.
The Standing Committee of the National People's Congress (NPC) is said to be looking to approve the fresh fiscal package, including 6 trillion yuan, which would partly be raised via special sovereign bonds, on the last day of a meeting from Nov. 4 to 8.
The Australian Dollar tends to benefit when investor optimism about China's prospects improves. Since Golden Week ended on October 7, efforts to revive the country's world-beating growth rates have increased.
Fiscal and monetary stimulus measures were initially greeted with enthusiasm by global investors, which was reflected in a stronger AUD, but the rally soon faded as markets questioned whether enough was being done.
The final details of next week's measures will prove the highlight for AUD exchange rates in the near term.