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Bank of America (BofA) analysts observed a breakdown in the traditional correlation between foreign exchange and equity markets, particularly in the context of recent US tariff announcements. These tariffs have led to significant declines in global equity futures and risk proxies such as the Australian Dollar (AUD), yet the US Dollar (USD) indices have concurrently traded lower.
The expected inverse relationship between risk assets and the USD has not materialized, indicating that the USD may continue to underperform amid ongoing tariff uncertainties. Bank of America’s analysts have adopted a bullish stance on the AUD against various currencies starting from the second quarter onwards.
Contrary to their bearish view in the first quarter, they now predict the AUD will outperform all other G10 currencies by the end of 2025. This forecast is based on several factors, including anticipated USD depreciation and the delayed effects of stimulus measures in China. BofA economists anticipate limited easing by the Reserve Bank of Australia (RBA), with only two more rate cuts expected in May and November 2025 to conclude the current cycle.
Market pricing, which indicates an 85 basis points (bps) cut by the end of the year and 97 bps by March 2026, is seen as a supportive factor for the AUD’s performance.
In light of these projections, BofA recommends investors to buy AUD/CNH, setting a target of 4.89 and a stop loss of 4.44, with the spot reference at 4.5835. The rationale for choosing AUD/CNH over AUD/USD is the lower beta of AUD/CNH to USD/CNH and the positive carry it offers.
Additionally, BofA analysts expect USD/CNH to gradually ascend to 7.5 by quarter-end. They do, however, caution that a large and disorderly devaluation of the Chinese Yuan (CNY) poses a risk to this trade recommendation.
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