FX Viewpoint 14 Jan 2022 | AUD: Poised for resilience in 2022 | Article – HSBC VisionGo
- The AUD should be able to hold its own against a robust USD in 2022, outperforming other major currencies…
- …but its fortunes hinge on how the gap between the RBA’s guidance and the market’s rate expectations changes over time
- Over the near term, the AUD may be challenged by swings in risk sentiment, in our view
We are positive on the AUD and believe it is better positioned to hold its own relative to other G10 peers vs a stronger USD in 2022 for two key reasons.
(1) More supportive rates backdrop, with the potential for the Reserve Bank of Australia (RBA) to turn more hawkish
The dominant driver for the AUD is likely its potential for higher short-term rates. Unlike the NZD, short-term AUD rates are still low relative to market pricing of the RBA’s terminal rate. This is measured by the difference between market expectations for the 1-month rate three years into the future, in 2025, and in one year’s time, i.e., 3y1m-1y1m (Chart 1). There is room for the short-term rates to better reflect the terminal rate and therefore support the AUD.
The data are evolving to suggest less dovish overtures from the RBA may be forthcoming
Some of this potential for a pulling forward of the terminal rate comes down to the RBA’s guidance, which has thus far been more dovish than many of its counterparts. Currently, a large gap remains between the market currently looking for three 25bp hikes by the end of 2022 and the RBA’s December guidance showing that it will be patient with its cash rate setting. The RBA also needs to be convinced that wages growth is running sufficiently strong that it is consistent with its inflation target. The latest CPI and wages growth data may not warrant a shift in the RBA’s rhetoric just yet; however, we believe momentum is moving in the right direction.
 Terminal rate is also known as natural interest rate which refers to the level of interest rate at which economic growth is on par with its potential and inflation is stable.
(2) Still positive outlook for parts of the external backdrop
The AUD has benefited from sizeable current account surpluses over the past few quarters, helped by a surge in commodity prices (Chart 2). This is unlikely to change in the coming quarters, as export growth should remain strong, supported by high commodity prices, China’s policy shift to boost growth, and stabilisation in the slowdown of global growth. All this should continue to support the AUD, in our view.
We believe the AUD may surprise many with how resilient it could be in 2022, despite its near-term challenge
However, some of these positive catalysts may not kick in more meaningfully until later this year. Over the near term, the AUD may still struggle, given its vulnerability to swings in risk appetite as the Federal Reserve nears its first rate hike with the need to tap the inflation brakes in focus.