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The aussie has barely paused since bouncing off 0.70 in early November and has just jumped above the 0.76 level. Commodities and related China industrial rebound plus global optimism underpinned by vaccine rollout should keep the AUD/USD uptrend intact multi-month. But Q1 could be more mixed, with no apparent risk premium priced to reflect the potential for China to keep scaling up its rejection of Australia’s exports. More Reserve Bank of Australia’s (RBA) QE is also on the way, helping cap rallies, per Westpac.

Key quotes

“Iron ore is likely to remain a source of strength for A$. Iron ore exports reached a record high A$11bn in Oct, 36% of Australia’s total exports. The federal government’s improved budget position published this week is in good part due to higher receipts from the mining sector. 

“With the US dollar under broad pressure, further appreciation is likely into early 2021. However, our end-Q1 21 forecast of 0.76 implies some headwinds capping gains. One is monetary policy. The RBA’s A$100B QE program will be wrapped up in a swift 6 months and with other major central banks continuing to expand their balance sheets and the RBA pointing to glacial wages growth undermining prospects of inflation returning to target, Westpac expects a further $100B in QE to be announced. This could come as early as the Feb meeting, keeping a lid on AUD.” 

“The economic news is likely to be mostly encouraging, with consumer and business confidence having already rebounded sharply, the household saving ratio a whopping 18.9% in Q3 and the pace of job creation again beating consensus in November. But it is not obvious how this translates to demand for AUD, with a revival in tourism and education exports still quite distant.” 

“Furthermore, AUD price action in recent weeks suggests negligible risk premium is in the price in the event that China scales up barriers to Australian exports even further. Australia’s coal exports to China over the past year for instance were near $11B; Chinese state media indicates that no such further imports are authorised. China also has alternative sources for a wide range of other imports that could come under fire in the new year. This story could move firmly onto the market radar in Q1, weighing on AUD on crosses and capping gains against a vulnerable USD.”