The Australian Dollar depreciated sharply through September but has subsequently traded in a very tight range through October, notes Goldman Sachs.

What was behind the drop?

“Our analysis suggests that the deterioration in market sentiment towards Chinese growth in early September and rising risk aversion were important triggers for AUD depreciation. The more recent tight range trading coincides with opposing forces on the AUD and broader US dollar stability,” GS adds.

Where to from here?

“Going forward, we are reluctant to call time on AUD weakness given that at 0.8788, the AUD is still overvalued to some extent, with GSDEER fair value at 0.80. However, the China data set for September provided evidence of a rebound in activity after a weak August and we expect the recent global growth concerns to dissipate, together with a reduction in risk aversion which may present near-term hurdles for further AUD depreciation,” GS answers

“These international factors are likely to present a hurdle for AUD depreciation in the near term, in addition to already stretched sort positioning according to the IMM data. It may only be around the turn of the year, when we expect the Chinese economy to start to slow again, that the catalyst may emerge for AUD weakness,” GS projects.

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