Image © Robyn Mac, Adobe Stock

- Buy the Aussie to profit from CNY recovery says Nordea Markets.

- Tip comes after Soc Gen pitches AUD/USD after close above 0.70.

- But domestic lenders inc CBA and Westpac less optimistic on AUD.

The Australian Dollar is a buy, according to analysts at Nordea Markets, who say it's in line to benefit from an ongoing economic recovery in China that should provide support to the currency in spite of weighty bets by the market suggesting the Reserve Bank of Australia (RBA) will soon cut interest rates.

Australia's currency was punished severely last year because of its strong positive correlation with China's Renmimbi, which suffered at the hands of speculators as the tariff fight between the world's two largest economies escalated, but it's domestic factors that harmed the Antipodean unit this year.

The outlook for the Australian economy is a long way off from being dire but growth is slowing and that's happening at a time when inflation pressures are already far too low for the Reserve Bank of Australia's liking, which means the odds of interest rate cuts have increased during recent months.

"Another week, another weak domestic data print from Australia. Calls for imminent rate cuts escalated quickly after last week’s CPI disappointment and almost all IBs now project 2 or 3 cuts from the RBA this year, while the market prices almost two full cuts for the remainder of 2019," says Martin Enlund, chief FX strategist at Nordea Markets. "So why on earth do we suggest buying AUD anyway? Due to non-domestic factors."

Above: Australian car sales alongside unemployment rate.

Australian GDP growth fell to 2.3% in 2018, from 2.8% previously, which defied RBA forecasts for economic growth closer to 3%. Alll of the indications are that the economy will slow further in 2019 but the RBA still projects growth of around 3% for this year and next.

The ebbing of momentum from the economy is important in the context of below-target inflation because the RBA needs demand within the economy to pick up if it is to have any hope of seeing the Australian consumer price index sustainably lifted to within the 2%-to-3% range the bank is targeting.

That's why financial markets have bet so heavily in recent weeks that two full interest rate cuts are now baked into the overnight-index-swap curve, which provides a rough estimate of market expectations for the RBA cash rate over the coming years.

The final nail in the coffin of Australian Dollar bulls was the first quarter inflation report, released last week, which showed the consumer price index falling to 1.3% last quarter, down from 1.8%, while the more important core-inflation rate dropped from 1.7% to 1.6%. The RBA needs both of these above 2%.

"A weaker CPI trend in Australia is mostly a lagged consequence of the tighter financial conditions in Asia in 2018. The softer financial conditions seen throughout 2019 will likely soon spill-over to a re-increase in the Australian CPI," Enlund writes, in a note to clients Monday. "We bet that the Q2 inflation report will be more upbeat than the Q1 report that we received last week."

Above: Westpac graph showing market expectations of G10 interest rates. Australia shown in yellow.

Enlund and the Nordea team have flagged what appears to be an economic recovery in China, which has been prompted by government efforts to stimulate growth through subsidised lending and a range of other policy tools.

They say this should eventually prove positive for many other closely connected economies including Australia. They're also looking for the U.S. Dollar to weaken broadly over the coming months in response to a more laid back Federal Reserve, which should provide a boost to the AUD/USD rate.

"We even see a decent risk/reward of a hawkish re-pricing of the RBA compared to the current gloomy outlook," Enlund says. "Yes, the RBA will likely cut once or twice this year, but that is already in the price. The best risk/reward is likely to pay the front now or else buy the AUD versus either NZD or USD."

Enlund isn't alone in backing the Australian Dollar because Kit Juckes, chief FX strategist at Societe Generale, wrote to clients last week suggesting they should buy the Aussie if the AUD/USD rate closed above the 0.70 level on Friday. AUD/USD closed the week around 0.7035.

Above: AUD/USD rate shown at weekly intervals.

However, and despite that some European banks have been drawn toward the Aussie by the market finally having priced-in all of the interest rate cuts the RBA can reasonably be expected to deliver this year, Australian domestic lenders are less than enthusiastic about the outlook for the Antipodean unit.

Commonwealth Bank of Australia says it's looking for the AUD/USD rate to remain close to 0.70 this week as housing-related economic data makes its way to the market. Australian house prices are in freefall in the major cities, which has prompted fears of negative wealth effects that damage household confidence, deter spending and constrain economic growth.

Further out, CBA forecasts the AUD/USD rate will move sideways within a narrow 0.70-0.72 range over the coming quarters. Westpac, another big four Australian lender, also says the Australian Dollar will be lucky if it is able to put much distance between itself and the 0.70 threshold this year.

"Our base case of GBP/USD roughly range-bound in the low 1.30s and AUD/USD slipping back to around 0.70 implies AUD/GBP returns to the 0.5325/50 area, GBP/AUD to 1.8700/50 by end-June," says Sean Callow, a strategist at Westpac, in a recent note to clients.

Above: Pound-to-Aussie rate shown at weekly intervals.

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