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- Bad news already in AUD/USD price says TD Securities.

- AUD/CAD trades with large risk premium and is now a buy.

- Likely easing of concerns over "trade war" is the main driver.

Australia's Dollar has likely seen its nadir against the U.S. greenback and there is scope for it to rise against the Canadian Dollar over coming weeks, according to analysts at TD Securities.

The Aussie has shed 9.1% of its value against the U.S. Dollar in 2018 and fallen more than 5% against the Canadian currency due to a litany of adverse developments.

However, the TD Securities team say much of the Aussie's losses were the result of anticipated future developments rather than current fundamentals, and the worst of those developments are now reflected in market pricing.

Moreover, they say the so called trade war between the U.S. and China will not escalate to the extent that markets have feared and are now advocating that clients of the bank buy the Aussie to take advantage of a likely Aussie recovery.

"We have added a long AUDCAD position," says Mark McCormick, North American head of FX strategy at TD Securities. "We believe that AUD has priced in a chunky risk premium on the US/China trade spats. It appears the market is toying with the idea of the UST labeling China a currency manipulator. We suspect they will refrain from this action.", leaving a bit more room to price out AUD's discount to cyclical drivers."

President Donald Trump's "trade war" against China has taken its toll on the Antipodean because the currency is underwritten by the nation's mammoth commodity trade with the world's second largest economy.

Therefore the Aussie is sensitive to changes in sentiment toward China, which is also the world's largest consumer of industrial metals, as well as movements in raw materials prices.

Trump has imposed tariffs on more than $250 billion of Chinese goods imported into the U.S. each year and is threatening to target a further $260 billion. That could hurt Chinese exports and economic growth.

"A proxy index for China stress also shows that AUDUSD is trading near the implied levels while AUDCAD should be trading around 0.9340. We think AUD is trading with a heavy risk premium while CAD reflects plenty of good news," McCormick adds.

Markets have speculated in recent days that Trump could use a looming U.S. Treasury report on practices rival countries use to manage their exchange rates as grounds to label China a "currency manipulator".

This would then give President Trump the necessary cover to impose further tariffs, or other sanctions, on the country.

McCormick and the TD Securities team say the White House is most likely to avoid this move and that an ensuing relief-rally could lift the Australian Dollar.

This is not only because of the economic connection between the two countries but also due to the Aussie's role as a surrogate for speculators seeking to express bearish views about China's state-managed Renmimbi.

If the White House was to label China a currency manipulator then the Renmimbi could suffer regardless of whether the People's Bank of China is in the fray encouraging losses alongside market speculators or not.

"We also note that AUD's growth signals have improved, albeit from low levels. Our tracking of market growth forecasts shows that the street has upgraded its view on year ahead growth. Consistent with this data set, AUD data surprises have performed well in both level, and delta terms are sitting near the upper end of the G10 league table," says McCormick.

A pause or de-escalation of the trade war would not only remove the "risk premium" embedded in Aussie exchange rates, but would also clear to way for currency traders to renew their focus on domestic fundamentals, which have become more supportive during recent weeks according to McCormick.

If that renewed focus leads markets to become more optimistic in their outlook for Australian interest rates then it would likely support the Antipodean expectations of changes in interest rates can exert a powerful push-and-pull influence on international capital flows and are also an allure for short-term speculators.

The Reserve Bank of Australia held its interest rate at a record low of 1.5% for what is now the 27th consecutive month while both the U.S. Federal Reserve and Bank of Canada have raised their own rates to 2.25% and 1.5% respectively. The U.S rate is expected to finish 2018 at 2.5% while analysts say the Canadian benchmark will rise to 1.75%.

"We enter a long AUDCAD position (spot reference: 0.9230) in our FX Model Portfolio with a target of 0.9600 and a stop-loss of 0.9040," McCormick writes, in a recent note to clients.

The AUD/USD rate was quoted 0.17% lower at 0.7111 during early trading Friday after having risen 0.75% on Thursday, while the AUD/CAD rate was 0.30% lower at 0.9256 after notching up a 0.56% gain previously. The Pound-to-Australian Dollar exchange rate was up 0.19% at 1.8610.

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