FX Viewpoint | AUD: Green light for outperformance this year | Article – HSBC VisionGo
- The relatively lacklustre AUD performance over the past month was likely influenced more by idiosyncratic factors
- Despite a dovish RBA, we still see potential upside in the AUD this year…
- …due to strong domestic fundamentals and a relatively supportive global backdrop
Broader dollar weakness has allowed for a gain in the AUD over the past month, but compared to the rest of G10, the AUD has actually performed deceptively poorly (Bloomberg, 20 May 2021). We think that the relatively weak AUD performance was likely influenced more by idiosyncratic factors, such as Australia’s rising trade tensions with China or rising COVID-19 case numbers in Asia, which have quashed the tentative dialogue of a travel bubble beyond the trans-Tasman region.
The AUD only had a modest gain against the USD over the past month, underperforming most other G10 currencies
Looking ahead, we believe strong domestic fundamentals and a relatively supportive global backdrop should support the AUD. Australia’s current account position has continued to improve, and the surplus has moved even higher in recent quarters. Much of this strength could be attributed to increasing commodities prices (Chart 1). In our view, as the global recovery gathers further steam, demand for commodities is likely to remain firm, supporting Australia’s terms of trade and current account balance. This is likely to remain a bullish feature for the AUD. A global recovery also bodes well for risk appetite, which will be AUD positive.
Beyond a healthy external balance, improving terms of trade and additional “risk on” sentiment should support the AUD this year
The Reserve Bank of Australia (RBA) will have its monetary policy meeting on 1 June, but a greater focus is likely to be paid on upcoming domestic economic data, which might shed some light into the RBA’s 6 July decision around a possible extension of its QE programme. As long as data beats expectations, the AUD should trade relatively well as markets increasingly price in a less dovish RBA. Yet, even if the domestic economy performs poorly, with markets already expecting a dovish RBA, the AUD may find itself maintaining the status quo.
A dovish RBA should not hamper the AUD’s climb, in our view
Rather than taking its cue from the central bank, bond yields in Australia seem to be pricing in the domestic economic upswing and have generally kept pace with the Q1 rise in US Treasury yields (Chart 2). Our economists expect a 4.3% increase in Australia’s GDP in 2021 compared to a 2.4% drop in 2020, erasing the pandemic losses quickly.
Australia’s bond yields have kept pace with the US
Beyond trade and monetary policy, it is also worth noting that the Australian government has announced a rather sizeable budget, with net debt projected to rise from 30% of GDP in 2020/21 to 40.9% of GDP in 2024/25. This would be growth supportive and is likely to further support the AUD, especially given the relatively low level of debt Australia has compared to many of its G10 peers.
We believe Australia’s sizable budget and its relatively low debt level is likely to provide further support for the currency
Overall, we expect the AUD to strengthen further against the USD this year.
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This report is dated as at 21 May 2021.
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