Australian dollar: Under the weight of the world

Analysts at Westpac cited the Australian dollar’s historical performances and key catalysts to justify its status as a global risk barometer. The report also anticipates the Aussie to recover during 2020 and 2021.

Key quotes

After reaching a peak just above USD0.70 at the turn of the year, the weight of the world has come to bear on the Australian dollar. Currently, the pair sits at USD0.67, but this follows a number of days when the currency traded below that mark in early February as coronavirus concerns peaked.

Equity markets have, to date, brushed off this real economy shock, showing little concern for the potential cost to future profits, or perhaps simply expressing a belief that central banks will act to offset any downside.

The sustained move in commodities, however, franks the economic significance of the coronavirus.

The other key variable that determines the fair value for the Australian dollar is the interest rate differential between Australia and the US.

Our timing for the RBA meanwhile has them lowering rates in April (ahead of the US) and then again in August, down to 0.25%.

Our forecast for the Australian dollar to only rise a cent from June 2020 to December 2020 could be regarded as evidence that this is a benign risk. However, this forecast necessitates that the RBA provides additional stimulus as it moves to unconventional measures.

Looking forward to 2021, a combination of a benign global outlook and a sense of stability in commodity markets should aid the Australian dollar back above USD0.70.

The further we move into that year, the more monetary policy will have been seen to be effective, as Australian GDP growth tends back to trend on broad-based gains across household demand and business investment. A peak of USD0.72 is seen at the end of 2021.

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