Australian Dollar Forecast: Wells Fargo Looks for Outperformance

"As for the Australian economy, growth has been steady, and we do not expect a recession to occur this year" - Wells Fargo.

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The Australian Dollar is a favourite for 2023 with the foreign exchange research team at Wells Fargo, the U.S. lender and investment bank.

In a regular monthly financial market research briefing analysts at the bank say they are looking for "Australian dollar outperformance" over the coming months.

"Given strong trade linkages, China's reopening should improve sentiment toward the Australian dollar," says Nick Bennenbroek, International Economist at Wells Fargo.

Positioning for Australian Dollar upside is one of the more popular trades amongst institutional currency strategists for 2023 amidst expectations of a rebound in Chinese economic growth after authorities jettisoned their zero-Covid policy.

The Aussie Dollar rallied through the latter part of 2022 and into 2023 as China lifted Covid restrictions, raising investor expectations for increased demand for Australian industrial commodity exports and an influx of high-value Chinese tourists and students into Australia.

But Wells Fargo says this external boost will only aid an already strong domestic economy.

"As for the Australian economy, growth has been steady, and we do not expect a recession to occur this year. With inflation somewhat elevated, we also do not expect Australia's central bank to ease monetary policy through 2024," says Bennenbroek.

The Aussie rallied on February 07 after the Reserve Bank of Australia cited higher-than-expected inflation for another 25 basis point interest rate increase while saying further rate hikes would be necessary.

The decision and guidance proved a 'hawkish' surprise to markets, which had only a few weeks prior anticipated the RBA as being one of the first major central banks to exit the rate hiking cycle.

Wells Fargo's Australia outlook is in contrast to their forecast for a U.S. recession and eventual Fed easing, which they believe should lead the Australian dollar to outperform the greenback.

"The Australian dollar has been a solid performer in recent months and is up 11% from its October 2022 low. Given recent developments, we believe this positive trend can continue and have adopted a more constructive medium-term outlook for AUD/USD, targeting an exchange rate of $0.7800 by mid-2024," says Bennenbroek.

Wells Fargo economists say economic growth in Australia should be sturdy enough to avoid recession, and with inflation still elevated at the highest rate in over 30 years, they do not expect the RBA to cut rates from now through mid-2024.

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Current market pricing meanwhile reveals investors are anticipating rate cuts from both the Federal Reserve and Bank of England before year-end.

This would pressure UK and U.S. bond yields more than those of Australia, offering the Aussie Dollar support from bond market flows.

"Favorable RBA monetary policy dynamics versus the Fed are the main factors that should be supportive of the Australian dollar over time," says Bennenbroek.

Strategists at JP Morgan meanwhile look to maintain a 'short' position on the British Pound against the Australian Dollar.

In a recent research and strategy note the Wall Street bank says it continues to favour the Australian currency as one of 2023's likely outperformers while saying the Pound should be held back by idiosyncratic risks.

"Hold GBP/AUD shorts," says James Nelligan at JP Morgan, "the BoE’s shift to a data-dependent stance... can be interpreted as incrementally dovish."

A 'short' is where a financial market participant sells a financial instrument in anticipation of further losses.

"Given sterling’s return to a more conventional rate differential reaction function this year, we see a weaker GBP from here," says Nelligan.