BILL’S BITES: AUD’s ascent not done yet

Bill Evans
01:08pm August 26 2020

Westpac chief economist Bill Evans discusses the outlook for the Australian dollar. (Josh Wall) 

As is usual with currency forecasting, predicting the end outcome isn’t an easy game, even more so in these incredibly uncertain times.

Still, our base case is that we the Australian dollar will continue its steady rise through the remainder of 2020 and 2021. 

Indeed, on August 21, we lifted our forecasts to US75c by the end of 2020 and US80c end 2021, compared to our prior expectations of US72c and US76c, respectively, made on June 5. Since then, the AUD has lifted steadily to US72c – already matching our prior year-end target.

So, why do we expect further momentum?

Firstly, the risks to our iron ore forecast of a fall to $US110 a tonne by year’s end may well be to the upside with demand from China likely to remain strong. 

Second, the cycles in the Australian dollar tend to be long – since the mid-1990’s only one was shorter than two years (post GFC collapse in 2009). This upswing which began in March 2020 looks set to last at least two years.
 

Other supportive factors include likely ongoing boosts to risk – firm commitments by central banks to support liquidity and demand; ongoing government stimulus; Australia’s ongoing current account surplus; and improving news around developments with vaccines. 

As to this final point, markets have recently been looking through adverse developments around the virus – perhaps giving more attention to promising news on the vaccine front, a “theme” we expect to be important for markets through 2020 and 2021.

Of course, there are risks to the outlook. 

For one, the Australian economy could do considerably worse than our current forecast of 3 per cent growth in 2021 and the unemployment rate falling to 7.8 per cent by year’s end. 

A frustrated RBA might then consider more policy stimulus, likely to be most effective through the Australian dollar, such as currency intervention or negative interest rates (the latter is likely to have a much more potent effect on the currency, as I have previously discussed). That policy would definitely derail our base scenario for the currency. 

To date, the RBA Governor has expressed concern about the credit creation process but, to my mind, has yet to set out a detailed argument to justify his “extraordinary unlikely” description of the possibility of negative rates.

All up, a steadily rising Australian dollar through the remainder of 2020 and 2021 looks the most prudent play at the moment. 

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.
 

Bill Evans

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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