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The Australian Dollar should be much higher than it is; analysts at Goldman Sachs investigate what's holding it back.

The Australian Dollar has long been a 'high beta' currency, i.e. one that tends to rise alongside rising global equity markets and struggle when stocks are headed in the opposite direction. In fact, Goldman Sachs analysis had previously shown the Aussie to be "the most high beta of the G10 currencies".

But something has shifted as the S&P 500 - a favoured proxy for global equity sentiment - continues to rack up record highs, yet the Aussie Dollar has struggled.

"With recent AUD weakness in the face of record S&P highs, AUD’s equity beta hardly seems to be "working." Since the start of the year, we have seen AUD underperformance relative to our BEER model implied returns," reads a new analysis from Goldman Sachs, entitled "AUD: Working hard, hardly working".

Analysts at the Wall Street investment bank note a couple of culprits, one being a mean reversion for global currencies from the trends of late last year. Those currencies that did well in the final weeks of 2023 are 2024's laggards.

But there is more: "While this appears to be the main factor, we also noted that China growth expectations have had a noticeable imprint on EM FX returns lately, and it looks like that is also true for AUD. The correlation between Chinese equity performance and AUD returns has increased since the start of the year," says Goldman Sachs.

Above: Cumulative factor contribution to AUD/USD returns since October 27th, 2023. "Chinese equity underperformance helps explain a meaningful portion of the residual between predicted and actual AUD performance in January" - Goldman Sachs.

In fact, when Chinese equity returns are incorporated into modelling, the result "helps explain a meaningful portion of the residual between predicted and actual AUD performance in January".

Chinese equity markets have struggled for a long period but have come under particular pressure in 2024 as the country's real estate downturn continues to reverberate.

China's CSI 1000 index declined 8% on Monday alone, taking it 30% lower in the first month of 2024. Over the preceding 10 days, China's CSI 1000 index was down a massive 21%.

The situation in Chinese equities has since stabilised as the government steps in to support the market. The intervention is just the latest in the Chinese government's patchwork of attempts to support its economy and financial system.

Looking ahead, the verdict from Goldman Sachs is that the Aussie Dollar is unlikely to see any significant turnaround in fortunes.

"We expect that persistently weak Chinese activity and depressed sentiment will continue to counterbalance this policy convergence story and AUD’s typical equity beta, keeping AUD somewhat under pressure for now," says Goldman Sachs.