Aussie Dollar (AUD) Still Has Upside, Says UBS

Aussie Dollar (AUD) Still Has Upside, Says UBS

 Published: October 18th, 2021

AUD spent most of the last week as one of the top-performing major currencies, and analysts believe the rally can carry on as the new session begins.

AUD advanced against all its G10 peers from Monday through Friday. Only the New Zealand Dollar (NZD) edged ahead with a nominal 0.1 per cent advance.

In a market briefing, forex strategists at UBS said that the Aussie ‘still has some gas in the tank’.

On Thursday, the bank recommended AUD as a short-term ‘buy’ against the Swiss franc, pitting the high-beta Australian dollar (e.g. one whose value tends to rise in tandem with global stock markets) against the traditionally safe-haven franc.

If stock prices and global market sentiment keep lifting this week after a sour patch in early Autumn, AUD is expected to see upside.

UBS thinks that other supportive factors could also come into play.

Rising commodity prices could boost Australia's exports, especially coal, metals, and liquefied natural gas (LNG). The state-wide re-opening of populous and economically important New South Wales is another factor, following a lengthy lockdown under COVID-19 rules, as is better-than-expected economic data, which points to rising business activity.

Currency strategists at Westpac in Sydney told Bloomberg that the commodity price spike is giving the Australian dollar added support.

‘The energy supply squeeze and surging demand for raw materials mean oil and gas exporters are leading the G10 this month, with AUD doing especially well off the back of the renewed commodity price rise’.

Coal, iron, and natural gas account for the majority of Down Under’s export basket. The extended and extraordinary surge in demand for coal and gas has the potential to deliver new all-time highs for Australia’s balance of trade from October through to Christmas.

Westpac's models suggest that AUD’s fair value has already reached a six-year high, prodded steadily upward by the ‘huge rise in commodity prices’.

That valuation will give AUD added support if, as some analysts have suggested, there is a resurgence in US dollar strength this week or if the Aussie comes up against new market stresses.

In October, AUD posted an overall advance of 2.39 per cent against the greenback, with the Australian-dollar-to-US-Dollar exchange rate lifting to 0.7431 at time of writing.

The Pound-to-Australian-dollar rate, meanwhile, has dipped 2.69 per cent lower for the month to date.

AUD has momentum

In a weekly strategy briefing, HSBC’s forex strategy unit said the Aussie has been building on strong momentum recently, with rising business confidence suggesting more support may appear this week.

Surveys of business confidence soared in September as states that had been under renewed lockdown prepared for re-opening after hitting key vaccine threshold targets.

The Australian National Association of Business (NAB) confidence monitor moved ahead to 12 points after sinking to a downwardly revised negative five in August.

Looking ahead, HSBC said AUD might find it harder to achieve larger or persistent gains ‘until the Reserve Bank of Australia give ground on its current dovish (interest rate) stance’.

The RBA is committed to its baseline 0.10 per cent interest rate until the end of 2023, although traders have been calling the central bank’s bluff by pricing in the date for a rate liftoff in late 2022.

The position the world’s central banks take on normalising interest rates, which essentially means allowing them to rise higher, will be a definitive price driver for many currencies and traded pairs.

Fiats managed by central banks further ahead in the race to economic normality are finding support, especially when pitted against peers run by central banks where an interest rate hike is unlikely in the medium term.

HSBC says AUD investors are resisting the RBA's contention that an interest rate rise is something for further down the road. The evidence suggests that the RBA is signalling more caution than is necessary, especially as ‘… the Aussie has experienced some of the biggest jumps amongst G10 currencies in recent weeks".

A storming start to the week

Almost on cue, the Australian dollar started last week’s session as the top-performing major currency, spurred upward by the re-opening of Sydney and forex analysts like UBS and HSBC predicting more upside in the coming days.

In a note to investors, currency analysts at Commonwealth Bank of Australia told Bloomberg that AUD is outperforming thanks to the end of lockdowns in Sydney and other regions of economically significant New South Wales, despite being expected by markets and already priced-in to a certain extent. ‘The outperformance reflects sunnier sentiment overall on near-term prospects for domestic economic growth,’ they said.

Public-facing businesses in Sydney re-opened their doors on Monday following nearly four months of lockdown, a trigger that economists believe will send economic growth back into positive figures.

The effect could get a multiplier in late October when the state of Victoria re-opens.

The Australian-to-US-dollar rate (AUD/USD) was at 0.7334 at the end of Monday's session, up 0.38 per cent on the day.

The Pound-to-Australian-dollar exchange rate (GBP/AUD) sat at 1.8561, down close to half a percentage point.

But Commonwealth Bank of Australia says rising base metal and energy prices could also play a supportive role for AUD as this week’s session begins.

China and India, the planet’s two biggest coal consumers, are in dire need of thermal coal, one of Australia’s specialist exports.

Reuters wrote last week that China's Liaoning province could experience a 4.73GW shortfall in electricity this month despite a lack of coal and faltering imports.

Heavy rainfall has exacerbated the problem, which has forced more than 60 of China’s coal mines to suspend operations, and rail lines to reduce freight service.

Nearly half of India’s 130 coal-fired power plants, which supply 70 per cent of the country’s power, are thought to be running on fumes, with coal reserves of under three days.

Australia's benchmark Newcastle coal surged in price last week as a result.

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