Outlook for AUD Still Gloomy as Economic Recovery Stalls Down Under

Outlook for AUD Still Gloomy as Economic Recovery Stalls Down Under

 Published: August 30th, 2021

Australia's dollar was on the back foot for much of last week but spent Friday’s session fighting back against currencies from the country’s biggest trading partners. That triggered speculation that AUD might be bottoming out after a long losing streak. However, clouds on the monetary horizon suggest those expecting a recovery could be in for a long wait.

On Friday, AUD was down against most of its major counterparts, with US dollar strength, a mixed commodities picture, and a glut of declines in global stock markets presenting an uneven backdrop for trading.

But when the Aussie’s exchange rate performances are weighted against the currencies of Australia's primary trade partner economies, AUD advanced against all but the euro. Analysts noted that the pace of AUD losses had already begun to slow in recent weeks.

‘We seem to be at an inflexion point where many of the recent trends could flip,’ Saxo Bank’s FX Strategy group said in a weekly forex market analysis. ‘We’re watching the coming sessions to see if the trend to weakness in AUD seen in late August will be neutralised or reaffirmed.

The deceleration in Australian dollar dips and its late-session bounce on Friday could be taken as a sign that the Down Under dollar is stabilising after months of sharp declines. Those losses were driven by several factors.

If AUD does find newfound stability, much will depend on the trajectory of the greenback and COVID-19 driven events in Australia, where new lockdowns and other efforts to contain the virus’s delta variant are being extended into the final quarter of the year.

Analysts at BofA Global Research told Bloomberg that ‘we see USD strength reflecting a combination of monetary policy divergence and commodity price instability. There have also been signs that risk aversion has taken hold globally this week’.

Commodity price softening and rising risk-off sentiment are both by-products of the recent worries about global growth, they added.

Trends could mitigate against a near-term AUD rise

BofA analysts also said they’ve been looking for AUD/USD to return to 0.77 by the end of September. However, Federal Reserve policy and global growth worries prompted a downgrade of that forecast to 0.73, which suggests limited scope for an Aussie recovery in the coming weeks.

AUD/USD did grasp the reins of 0.72 this week and edged above 0.7250 late on Friday, despite having dropped as low as 0.7104 in the week prior (wc 16th August). Analysts have reacted coolly to any suggestion that last Friday’s price rise is anything more than a blip.

Forex Strategists at Rabobank told the Financial Times that year-end forecasts for AUD/USD were revised downward based on expectations of stronger USD and that Australia’s central bank would later than others on policy tightening. ‘The clouds gathering around AUD in August have already taken the pair below what we’d forecast. We are therefore reducing our AUD/USD forecasts again’.

Rabobank team also pointed to market anxiety as the coronavirus once again threatens economic growth, the shift to safe havens like the US Dollar, and the potential impact on Reserve Bank of Australia policy as a result of Australia’s own battle with the virus.

They’re expecting AUD/USD to slip further in Q4. Revised forecasts also warn of a pound-to-Australian dollar rally to 1.94 over the next four weeks and say there is scope for additional increases to as high as 1.98 between now and December.

RBA preparing for stormy waters ahead

Minutes from the Reserve Bank of Australia’s policy meeting in August suggests the bank is getting ready to bin an earlier decision that would see it start reducing monetary stimulus and scale back its quantitative easing programme.

This was after an earlier surprise decision at the end of July to press on with the previously agreed tapering process, despite key sectors returning to ‘lockdown’ just weeks before. The restrictions were expected to be short-lived, and RBA officials have been steadfast in their conviction that the Aussie economy will rebound rapidly once commercial restrictions are rescinded.

A number of state-level shutdowns have been extended since then, and Canberra has indicated that further easing of restrictions is be tied to hitting strict progress milestones in rolling out the country’s vaccination programme.

Dean Marlowe, a currency strategist at Westpac in Melbourne, told Bloomberg that ‘The pullback in USD we saw on Friday gave the Aussie a short breather, but it’s probably over. A drip-drip of negative lockdown news and stable USD fundamentals point to more time in the 0.71 doldrums’.

Markets are now trying to determine whether the RBA will press on with the planned reduction in the amount of Australian government bonds it buys each week. The answer will be an essential signal that’s likely to drive short-term price action.

The central bank will make its next monetary policy announcement on 7th September. AUD watchers will scrutinise the text closely, and Marlowe says there could be implications for GBP/AUD as well, which Westpac thinks has room to rise above 1.91 in the coming weeks.

‘The RBA’s guidance that the cash rate won’t move until 2024 at the earliest is more dovish than the Bank of England’s support for the pound. AUD will also find little comfort in local economic numbers as lockdowns continue. We’re looking to mining company dividends in Q4 as a signal that AUD might be ready to recover,” Marlowe wrote in a Thursday note to investors. ‘News headlines in the week ahead, however, seem highly unlikely to give the Aussie any kind of lift.’

Earlier this year, Westpac forecast an AUD recovery in Q4 but now see AUD/USD potentially falling back to 0.70 in the next few weeks. AUD/GBP could also see further losses, even dipping below 0.51 in September and October.

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