NAB Forecasts Australian Dollar Bull Run against Pound, Euro and U.S. Dollar to Continue

- AUD to benefit from supportive commodity prices
- Chinese unlikely to tariff Aussie iron ore, coal and LNG
- Loss of Chinese tourists & students a risk to the outlook

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Expect any Australian Dollar weakness to be shallow, say analysts at Australian lender NAB who have told clients they expect the currency's 2020 bull market to remain intact.

In a monthly research note detailing their latest assessment of the foreign exchange market, NAB says there remains an intact case for higher levels in the Aussie Dollar in 2020 and beyond.

Underpinning expectations for a robust Aussie Dollar going forward is the ongoing global recovery story - particularly that of China - and policy support that has underpinned a strong recovery in stock markets, to which Australian Dollar performance remains positively correlated too.

In addition, expectations for further support out of China via strong demand for Australian commodity exports remain intact.

"The infrastructure-heavy China recovery story and what that means for key Australian commodity export prices remain part of the forecast narrative," says Ray Attrill, Head of FX Strategy at NAB. "Nothing in the latest China economic data gives pause for re-assessment at this juncture."

A risk to the assumption that China will remain a positive driver for the currency are more "draconian actions by China against key Australian exports."

China has hit some Australian exports, such as barley, with tariffs in response to Australia's demands for a transparent investigation into the origins of covid-19 and the role of Chinese authorities in the early stages of the outbreak.

The heat was turned up this week China announced it had started an anti-dumping investigation into Australian wine, the latest measure to target the nation’s exports as relations between the two states deteriorate.

"Wine is likely next in line, but the bigger risk, as and when borders re-open, is from a reduction in the inflow of Chinese tourists and students," says Attrill.

NAB do however believe the really significant export earners for Australia of iron ore, coal and LNG will ultimately be exempt from any mini trade war with China, as the country's economy is highly dependent on these raw materials.

NAB are forecasting an Australian-to-Pound exchange rate of 0.55 by the end of September, 0.54 by year-end, 0.54 by March 2021 and 0.55 by June 2021. This gives a Pound-to-Australian Dollar exchange rate of 1.82, 1.85, 1.85 and 1.82 for the respective timeframes. (If you wish to lock in current rates for future use, or automatically trade at better rates in the future, please see here).

The Australian-to-Euro exchange rate is forecast at 0.61 by September, 0.61 by year-end, 0.61 by March 2021 and 0.62 by mid-2021. This gives a Euro-to-Australian Dollar exchange rate of 1.64, 1.64, 1.64 and 1.61.

The Australian Dollar-to-U.S. Dollar exchange rate is forecast at 0.72 by the end of September, 0.740 by year-end, 0.76 by March 2021 and 0.77 by mid-2021.

The bullish slant on the Aussie Dollar held by NAB is shared by another local lender, Commonwealth Bank of Australia (CBA).

CBA say an "unstoppable" rally in commodity prices is likely to keep the Australian Dollar firmly supported against the U.S. Dollar according to a prominent analyst we follow, however a period of outperformance by Sterling is ensuring the GBP/AUD continues to hold the lion's share of its July recovery.

"The recent rally in some commodity prices seems unstoppable," says Joseph Capurso, Currency Strategist at CBA. "Commodity prices are an important driver of AUD."

Iron ore market dynamics are particularly supportive given this commodity is Australia's single largest export and foreign exchange earner. "Iron ore prices – Australia’s largest commodity export – rose to six‑year highs. Even stronger demand for iron ore is expected in coming months because of seasonality and pent‑up demand," adds Capurso.

Chinese iron ore imports rose 17% last week driving iron ore prices to US$117.3/t on Tuesday. According to SP Angel - a London based brokerage - iron ore arrivals at Chinese ports rose 2.16mt to 14.81mt compared to the week prior, and 410,000t from the same period last year.

Australia remains the single largest beneficiary of the bullish iron market dynamics as departures from Australian ports rose 1.4mt from the week prior to 16.32mt, whilst shipments from Brazil increased by 370,000t to 7.59mt.

Iron ore remains a key source of valuation for the Australian Dollar says Capurso, "the elevated iron ore prices (amongst other commodity prices) will in turn underpin AUD".

Image courtesy of CBA

"The major driver of higher iron ore prices has been Chinese demand. As part of its fiscal stimulus, China ramped up its funding to commodity‑intensive infrastructure projects. The funds need to be allocated by local governments by the end of October and will therefore support Chinese steel demand in the near term," says Capurso.

(Some of the institutional research cited in the above provided by FXwatcher.com).