The UBS Weekly Investment Strategy Note from the Swiss bank’s Chief Investment Office (CIO) said Australia runs a current account deficit and that reduced inflows could hurt.
Over the next 12 months, the CIO expects the Aussie dollar to depreciate to $0.85 against the US dollar, while the Chinese yuan will likely appreciate to 5.95 against the greenback.
“As such, investors still holding on to the Aussie dollar for investment purposes should consider switching to the Chinese currency," said CIO analyst Tan Teck-Leng.
“On the valuation front, the Aussie dollar is still overvalued by 15 per cent in purchasing power parity terms, while the yuan is undervalued,” said Mr Tan.
“On top of that, China is rebalancing its economy, which could weaken demand for Australian commodities and weaken capital inflows even more.”
The CIO expects the Fed to continue tapering for the reminder of 2014 before winding down the entire program by the end of the year.
The report noted that the focus of the week will be Thursday’s Labour Force Survey results – or December employment report – as a key economic indicator.
