Australian Dollar Undervaluation to Fade in 2022: CBA

Image © Neal Jennings, Reproduced under CC licensing.

Commonwealth Bank of Australia forecast the Australian Dollar to come under pressure over the remainder of 2021, but they forecast a recovery against the Dollar, Pound and Euro shaping up for 2022.

In a new briefing to corporate clients, CBA sees the Aussie Dollar trading weaker than consensus estimates expect, particularly given their view the market is wrong to expect an interest rate rise at the Reserve Bank of Australia (RBA) in 2022.

Money market pricing now shows investors are pivoting for a rate hike at the RBA in 2022 as the central bank joins global peers in responding to rising inflation levels.

• GBP/AUD reference rates at publication:
  Spot: 1.8351
• High street bank rates (indicative band): 1.7714-1.7842
• Payment specialist rates (indicative band): 1.8190-1.8264
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

A surge in inflation across the world has seen markets pull forward expectations for central bank policy normalisations, including at the RBA.

This might have offered the Australian Dollar some support over recent weeks.

But, the risk to this view is that central banks push back at market expectations, in a similar vein to the Bank of England which in early November disappointed markets which were geared for a November/December rate hike.

"We expect AUD/USD to remain heavy in the remainder of 2021. In our view, pricing for a series of interest rate hikes by the Reserve Bank of Australia in 2022 is too much too soon," says CBA.

They say Australian inflation in wages and prices is muted compared to other economies they monitor where rate hikes are likely to be delivered sooner.

The Federal Reserve is expected to raise rates in 2022.

Although the Australian Dollar is seen as being under pressure over the remainder of the year 2022 will see it advance as its undervaluation fades.

Analysts do acknowledge a risk that AUD/USD converges to "fair value" sooner than their forecasts, meaning AUD/USD might not reach as low as 0.72 at the end of December 2021 and March 2022.

Their year-end point forecast for the Australian Dollar to Pound exchange rate is 0.54, for March 2022 it is 0.53, for June 2022 it is 0.55 and year-end 2022 it is 0.57.

This translates into Pound to Australian Dollar exchange rate targets of: 1.85, 1.89, 1.82 and 1.75.

The Australian Dollar to U.S. Dollar point targets are 0.72 for year-end, 0.72 for March 2022, 0.75 for June and 0.80 for end-2022.

Euro to Australian Dollar forecast targets are 0.64 for year-end 2021, 0.64 for March 2022, 0.66 for June and 0.68 for year-end 2022.

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