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Bank of America is constructive on the Australian Dollar over 2024 as the Reserve Bank of Australia holds interest rates while its peers cut, and peak pessimism towards China passes.

But in a note detailing its stance on the Australian Dollar, BofA says a medium-term constructive view is also partly built on an expectation the Aussie will become less sensitive to global risk sentiment.

The Australian Dollar screens as being one of the most highly sensitive currencies to global risk sentiment, rising and falling alongside stocks, giving it a 'high beta' label.

This exposes AUD to weakness at times of equity market decline and is a major downside risk factor in 2024 in the event of any recession-led market retracement.

But analyst Adarsh Sinha says the Aussie Dollar is proving more durable thanks to Australia's export diversification and improvement in net foreign liabilities.

In fact, once the strength of the U.S. dollar is removed from the equation, the broader Australian dollar appears robust and poised to outperform over the coming months.

Regarding exports, Bank of America's research finds that AUD has proven remarkably resilient to the Chinese economic slowdown of recent months, and its correlation with equity market performance appears to be waning.

Above: "Australia exports (% of total) Australia’s exports to rest of Asia provided buffer to China contraction" - BofA.

Of note is a diversifying export profile away from one that China heavily dominated; "exports (especially energy) to other major Asian economies provide a meaningful offset to China," says Sinha.

Regarding the Net International Investment Position (NIIP), Sinha says that at -31.1% of GDP in 3Q23, the NIIP is at multi-decade highs.

Above: "Australia's net foreign liabilities (% GDP) at lowest level in decades, and net creditor in equities; should lower AUD risk sensitivity over time" - BofA.

"This improvement is the consequence of running large current account surpluses in recent years. But the composition of this increase is critical - the recycling of current account surpluses to foreign equities (primarily by superannuation funds) has taken the net foreign asset position in equities to +13.4% of GDP. Australia's net creditor position in equities may also explain its occasionally lower beta to US equity markets," says Sinha.

According to Sinha, other factors to expect AUD outperformance this year include:

The RBA is to be among the few central banks that do not cut in 2024, partly because the policy rate is less restrictive than elsewhere.China sentiment remains at bearish extremes.Service sector exports have recovered sharply but not yet back to trend levels nor share of exports observed pre-pandemic – the recovery could further support AUD.Australia remains in a strong fiscal position relative to its G10 peers, both in terms of deficit and debt levels. This allows some room for fiscal support in the event of a growth downturn, reducing the burden on monetary easing.While AUD is perceived as a “high beta” currency, an improving NIIP should reduce its sensitivity to risk over time.