Australian Dollar Forecast Upgrades Abound amid U.S. Dollar Rout and Chinese Economic Turmoil 

Image © Adobe Images

• GBP/AUD spot rate at time of writing: 1.8306
• Bank transfer rate (indicative guide): 1.7665-1.7793
• FX specialist providers (indicative guide): 1.8031-1.8141
• More information on FX specialist rates here

The Australian Dollar was down on its luck Friday amid a rebound in U.S. exchange rates but forecasts were in the spotlight as analysts remained bearish in their outlooks for the American currency while taking stock of improved prospects for commodity prices, leading to widespread upgrades. 

Australia's commodity-backed Dollar is a 'high beta' currency and so trades in the opposite direction to the U.S. Dollar Index that clocked its best intraday gain since June on Friday. AUD/USD was -0.55% lower at 0.7151 as the Dollar Index rose 0.68% to 93.37, while the greenback gained over all major rivals. 

This, combined with unusually high correlations among currencies as well as between them and other assets, goes some way to explaining how the Pound-to-Australian Dollar rate has managed to trade in such a stiflingly narrow range this August. It's mostly traded between 1.83 and 1.84.

"Price action this week and today in particular reinforce our view of short-term direction favouring the dollar. Our quant metrics and our other short-term FX indicators all indicate the same – the dollar sell-off is stretched and a correction is overdue. While developments in the US are hardly USD bullish, events in Europe continue to turn more bearish," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "The PMIs in Europe highlight the first signs of the economic impact of the renewed spread of COVID while UK-EU trade talks did not go well this week."

Above: AUD/USD rate shown at 4-hour intervals alongside Pound-to-Australian Dollar rate (black line, left axis).

GBP/AUD is one half comprised of GBP/USD, which follows the EUR/USD that accounts for more than half the flows measured by the Dollar Index. When the latter rises, the Euro, Sterling and the Aussie are often found in retreat.

All have traded within narrow ranges this month but the August consolidation can't continue forever and the U.S. Dollar itself is widely expected to fall further in the months ahead, driving fresh gains for the Aussie and other currencies.

Analysts are increasingly forecasting even larger Aussie bull run than was thought likely before and in sufficient number that they could soon move the consensus and overall market expectations for the antipodean unit.

"The case for this momentum to stall is not convincing so we are obliged to bring forward some of the strength through 2021 into the back end of 2020. Recall we expected the AUD to rise by US 4¢ through 2021 to USD0.76," says Bill Evans, chief economist at Westpac. "Accordingly, we have boosted our end 2020 forecast from USD0.72 to USD 0.75 while the 2021 scenario of a further solid boost to AUD remains intact with the resulting forecast for AUD to reach USD 0.80 by end 2021. That represents a US5¢ lift."  

Westpac financial models suggest the Australian Dollar remains undervalued even after a run on the U.S. Dollar that lifted AUD/USD by 32% between March 19 and August 19, while risks to all-important prices of commodities like iron ore are judged to be to the upside given strong Chinese demand for raw materials. 

Above: AUD/USD rate shown at daily intervals alongside Pound-to-Australian Dollar rate (black line, left axis).

"This upswing which began in March 2020 and is partly associated with China’s extraordinary recovery from its 10% contraction in the March quarter looks set to last at least two years," Evans says, citing seven Australian Dollar trends that have mostly endured for at least two years since the mid-1990's. "The risk is if the Australian economy does considerably worse than our current forecast of 3% growth in 2021 with the unemployment rate falling to 7.8% by year’s end. A frustrated RBA might consider more policy stimulus, which is likely to be most effective through the AUD. Currency intervention would be one option while negative interest rates are likely to have a much more potent effect on AUD. The world has never seen the experiment of a small open economy with large foreign debt offering investors a negative return."

Westpac, Australia's third largest lender according to S&P Global Market Intelligence rankings, also cites an ongoing current account surplus, policies of the world's central banks, enhanced government spending and prospects for a coronavirus vaccine all as being supportive for the Australian Dollar. 

It forecasts a Pound-to-Australian Dollar rate of 1.7733 by year-end, implying around a -3% fall from Friday's 1.83 level. 

"Worth noting too that there is scant evidence of long speculative positioning in AUD," says Ray Attrill, head of FX strategy at NAB, who forecasts a GBP/AUD rate of 1.85 by year-end. "There is currently no positioning impediment to higher AUD levels. We are as comfortable as we can be with our AUD/USD forecasts, last updated on 31 July, which as a reminder see the pair at 0.72 at end-September and 0.74 at year-end, before advancing further in 2021 and 2022 to a high of near 0.80. The infrastructure-heavy China recovery story and what that means for key Australian commodity export prices remain part of the forecast narrative (and part and parcel with a weaker USD)."

Above: AUD/USD rate shown at weekly intervals alongside Pound-to-Australian Dollar rate (black line, left axis).

"We have made a few minor tweaks to our AUD/USD forecasts to include some further strength, sooner. We recently estimated fair value for AUD/USD is in a range of 0.71 to 0.82, centred on 0.77. Our forecasts have AUD/USD gradually lifting to 0.78 over the next year," says Elias Haddad, a senior strategist at Commonwealth Bank of Australia. "Commodity prices are the main driver of AUD/USD. Our commodity strategist predicts a modest increase in Australian commodity prices in the next few years. However, the risk is higher commodity prices because China is ramping up commodity-heavy infrastructure spending." 

CBA, Australia's largest lender as measured by S&P, upgraded forecasts on Thursday and is also eyeing improved Chinese commodity demand. China's economy was already on the back foot before 2020 but has since been ravaged not only by the coronavirus, but also heavy rainfall and widespread flooding.

As a result, the government announced a $500 billion spending package in May that favours resource intensive activities. Those might be bolstered anyway through repairs of damage caused by the floods. Australia is China's number one supplier of commodities and China, Australia's largest export market.

China was the first to contract and vanquish the coronavirus between January and March but, unlike with others that suffered later and in some cases longer, parts of its economy do not appear to have rebounded much. National Bureau of Statistics of China data suggests the economy grew by 11.5% when the second quarter is compared with the prior period and by an annualised 3.2%m but that retail sales have fallen in each and every month of 2020. 

CommBank forecasts an AUD/USD rate of 0.75 by year-end and a Pound-to-Australian Dollar rate of 1.80.