Australian Dollar an Attractive Buy

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Betting on Australian Dollar strength into year-end remains an attractive proposition for strategists at UBS.

"Our positive AUD views have been reinforced by the bounce in commodity prices on the back of China's stimulus," says Shahab Jalinoos, Strategist at UBS.

He explains the stimulus "appears to have moved the needle on speculative positioning which has finally flipped long AUD, while Superannuation funds have also been AUD buyers as evidenced by the recent increase in their equity FX hedge ratios."

Currency valuations are meanwhile seen as more attractive than at the start of the month when the Aussie Dollar was at higher levels and the U.S. Dollar was weaker.

Jalinoos says investors who still think the bigger cycle of Aussie Dollar strength and U.S. Dollar weakness remains intact now have more attractive entry levels to gain exposure to the trade.

Yet, markets are entering a crucial period with the U.S. election just a month away.

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Measures of FX market volatility show expectations for a sharp rise in volatility around the vote, given that the outcome of the presidential election is too close to call.

"The odds rise that the period ahead of the elections sees more short-term tactical trading rather than the start of persistent trends – unless the polls start to point to a clear winner," says Jalinoos.

This can pose some near-term headwinds to the Australian Dollar while also potentially bolstering the Dollar.

Aussie Dollar losses could be limited if China's State Council Information Office (SCIO) announces a fresh fiscal stimulus this coming Saturday, as China-watchers now expect.

It was the SCIO that announced the 2008 stimulus.

"China’s stimulus announcement and the subsequent bounce in commodity prices is in theory a very different dynamic and offers a better hope for a positive AUD impact since it’s driven by expectations of a rebound in domestic demand," says UBS analyst Vassili Serebriakov.