Published: December 22nd, 2021
The Australian dollar (AUD) is being pegged to advance against both the greenback and the pound next year by one of the world’s biggest banks, though investors will have to look to the second half of the year to realise gains.
Forex analysts at Bank of America say that an ongoing tug-of-war between positive and negative market drivers that are keeping the Aussie in check this year will likely continue to exert influence for the coming months.
‘The stalemate between central bank policy normalisation and interest rate divergence with China will continue to be key AUD influencers in 2022,’ said Bank of America’s Hong Kong-based FX Strategy unit.
In a market analysis released this week, BoA said the slower pace of monetary policy easing by Beijing, coupled with the dovish guidance by the Reserve Bank of Australia (RBA), will remain negatives for the near term.
‘A faster pace of policy tightening by the US Fed and a stronger USD will also be critical factors.’
Looking to the second half of the year, however, BoA says AUD positives abound that will allow Down Under’s fiat currency to advance, potentially seeing AUD/USD reach 0.77 from the 0.7120 posted at time of writing.
The bank’s economists, meanwhile, are forecasting Australian economic growth next year to reach four per cent, which is above consensus, creating ‘a rather constructive backdrop for AUD in 2H 2022.’
Analysts expect the Reserve Bank of Australia to react to improving Australian economic conditions and raise rates in the fourth quarter. Policymakers’ confidence in lifting rates from record lows will depend on progress in hitting wage, inflation, and employment targets.
Wage growth is on a path to reach three per cent by the end of 2022, hitting a key RBA target before higher rates are triggered.
BoA says the Aussie has resisted the drag caused by slowing Chinese growth and lack of RBA action over recent months. This suggests that forex traders may have priced-in headwinds for the near term.
Bank economists are looking for more aggressive policy easing by China next year, which could spark Chinese imports as well as export prices for Australian commodities.
'Policy easing by Beijing should be supportive; however, we still see some lag and expect the real impact to be felt later in 2022.’
The AUD/USD exchange rate is forecast to hit 0.73 by the end of the first quarter, reaching 0.74 by the end of the second quarter and 0.77 by the end of Q3. The bank thinks AUD’s point forecast against the dollar will finish next year at 0.79.
Global lender HSBC also believes the Australian dollar will appreciate in 2022. Along with the US dollar, the bank’s FX Research unit believes AUD will be ‘in a stronger position’ in the coming months, perhaps seeing gains against other G10 peers sooner than BoA is expecting.
In a note to investors, HSBC says traders should look for currencies offering both positive carry and support from central banks looking to normalise monetary policy faster and by a larger magnitude than others.
‘Seen from this angle, the greenback is still a standout, but so is the Australian dollar.’
In its 2022 annual currency outlook publication, HSBC’s support for the Australian dollar signals a thumbs-up to markets by one of the world's most prominent corporate and investment banks after a difficult calendar year marked by underperformance in Down Under’s fiat.
The struggling Australian dollar has dwindled close to the back of the G10 performance pack, only posting modest gains against Sweden’s Krona and the Japanese Yen.
The pound to Australian dollar rate has seen gains of 4.5 per cent this year, while the Aussie has fallen even further behind the greenback, training by a more substantial 7.4 per cent.
Central bank policy will keep on driving major currencies next year, HSBC says, with those currencies owned by central banks that are keen to speed up the cycle of interest rate hikes likely to benefit more.
The Reserve Bank of Australia has sustained 'dovish' guidance for most of this year but ultimately had to cast off its very loose policy stance due to the relative resilience of the Australian economy.
‘Market pricing suggests there is more room for additional new hawkish surprises and that could be supportive for the Aussie in relative terms, ‘ HSBC analysts say.
For that reason, the bank sees little justification in favouring fiats from central banks seen as ‘rate hike laggards,’ which would include the krona, euro, yen, and Swiss franc.
If additional yields are paid on Australian financial products because of a shift in RBA policy, this could be a key source of support for the Aussie next year. However, the bank says other factors could offer support as well.
HSBC notes the sharp deceleration in global business activity that has acted as a drag on AUD in the second half of this year should be less of a concern as growth stabilises in 2022.
Analysts also expect China’s economy to right itself in the first quarter of next year thanks to new policy stimulus.
HSBC have upgraded their profile forecast for the Australian dollar against the US greenback, with a revised point forecast of 0.73 for the end of Q1 2022. That forecast is maintained through to the 2022 year-end.
Then bank’s previous AUD/USD forecast for 2022 was set at 0.71 for the end of the first quarter, then dropping back to 0.70 for the remaining three quarters.
HSBC’s basis point forecast for GBP/USD is 1.34 for the end of the first quarter of 2022, 1.33 for the end of the second quarter, and 1.31 for the end of the third quarter. At year-end, the forecast is 1.30, a downgrade from the 1.34 previously forecast for the entire year.