"Brave new world" for Australian Dollar: Westpac

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Any weakness in the Australian Dollar is being viewed by strategists at Westpac as an opportunity to buy, a view which if correct would mean Pound-Australian Dollar exchange rate upside will remain limited near-term.

The Australian lender and financial services provider says the country's strong terms of trade and supportive tailwinds from China are two compelling reasons to anticipate further outperformance by the Aussie currency.

In fact, Richard Franulovich, Head of FX Strategy at Westpac, says the Australian Dollar has entered into a "brave new world" - one in which it also appreciates during times of global market turbulence.

Data shows the Australian and New Zealand Dollars have been outperformers during the period of market stress associated with the war in Ukraine when typically these two 'commodity' currencies would be expected to fall when global markets are under pressure.

"The commodity currencies and the USD are clinging to their recent highs. The twin outperformance of the USD and AUD has been one of the more unexpected correlation shifts in FX markets lately," says Franulovich.

Above: GBP/AUD (top) and AUD/USD (bottom).

• GBP to AUD reference rates at publication:
  Spot: 1.7790
• High street bank rates (indicative band): 1.7167-1.7292
• Payment specialist rates (indicative band): 1.7630-1.7665
• Find out about specialist rates, here
• Set up an exchange rate alert, here

The Pound to Australian Dollar exchange rate (GBP/AUD) was as high as 1.9221 on the eve of Russia's invasion of Ukraine, but fell back sharply to record a war-time low of 1.7734.

Against the U.S. Dollar the Australian currency actually appreciated from 0.6967 to 0.7441, a move that would defy a long-held narrative that during times of geopolitical stress the Dollar advances against the 'high beta' Aussie.

"The 20 day correlation between the level of the AUD and the DXY hit a peak of +0.8 last week, its highest levels in at least 20 years, as the outbreak of war triggered soaring commodity prices and a scramble for safe havens. The AUD’s credentials as a reliable 'risk-off' hedge are now in doubt," says Franulovich.

Australia's foreign currency earning potential has risen significantly since the war in Ukraine turbo charged the price of global commodities, of which Australia has in abundance.

But beyond Ukraine, supportive developments out of China are also noted.

"China’s policy makers have vowed to keep markets stable and they are shifting to a more accommodative policy stance. There are tentative signs that China’s zero Covid strategy is being loosened too, good news for supply chains and the AUD," says Franulovich.

We reported last week the Australian Dollar's rally was checked during a sizeable slump in Chinese stock valuations as investors feared a major Coronavirus outbreak is about to hit the world's most populous country, even as authorities continue to insist on a zero-covid policy.

The Hong Kong outbreak is characterised by a notably fierce mortality rate, unseen elsewhere in the world, and with the virus spreading through Shenzhen, Dongguan and Shanghai investors are nervous.

But Chinese authorities were quick to offer support for the economy and financial markets: Vice Premier Liu He, Chair of the Financial Stability and Development Committee, committed to keep the equity market stable and to take measures in the first quarter to boost the economy.

"That is a clear indication of imminent policy support," says Derek Halpenny, Head of Research for Global Markets at MUFG. "Unfolding developments in China should not be ignored".

Liu encouraged long-term institutional investors to increase their shareholdings, while promising to closely communicate with the Hong Kong regulator to maintain stability in the city's financial market.

"Against that backdrop AUD can remain an outperformer," says Franulovich.

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His colleague at Westpac, Senior Currency Strategist Sean Callow, also points out domestic conditions in Australia are supportive, citing Australia's February jobs report which showed an increase in employment of 77k.

The unemployment rate fell to 4.0%, despite record high labour force participation.

Strategically, Westpac are looking at any weakness in the Aussie as an opportunity to buy.

"Given the tremendous strength in Australia’s trade position, we have been looking for A$ dips to buy," says Callow.

The bank is looking for a move in AUD/USD towards 0.75/0.76 through the third and fourth quarters of the year.

"We expect Australia’s key commodity prices to be resilient multi-month, despite wild volatility lately. The domestic economy also appears solid, ensuring markets remain eager to price in RBA tightening," says Callow.

Should GBP/USD stay stable or decline over this period then the downside pressure on the GBP/AUD cross would be notable.