A trough-to-peak rise of 38% is impressive for most stocks – and a rarity in currency markets, yet that is what happened to AUD/USD in 2021. Australia’s success against COVID-19, Chinese demand and central bank action are behind the rise from the ashes. These trends will likely extend into early 2021 when Australia’s relative advantage should keep it bid. However, worsening relations with China are set to weigh on the aussie, especially in the latter half of the year, FXStreet’s Analyst Yohay Elam reports.
Key quotes
“Australia may officially be a continent, but being an isolated island nation is one reason it successfully coped with coronavirus. Early on, the land down under restricted travel and forced entrants into strict quarantines, successfully stemming the virus’s first wave while temperatures fell.”
“China is moving away from the classic industry and massive building into technology. The world’s second-largest economy is, therefore, less dependent on Australian commodities. Is the land down under ready to also move away from its dependence on China? That will probably take some time, and in the meantime, Sino-Australian relations may further deteriorate in 2021, weighing on the Aussie.”
“While London is under severe Tier 3 restrictions, New York is facing a shutdown and Christmas looks gloomy in Berlin, Sydney’s Bondi Beach will likely be packed around New Year’s Eve and beyond. However, this Australian summer is set to end once vaccine production and distribution ramp up elsewhere. On one hand, growing demand for Australian exports is good news for the nation and the recovery could gather some pace. However, it would eventually erode its advantage. Investors chasing higher returns may move away from the South Pacific, weighing on the Aussie in the latter part of the year.”
“Federal Reserve’s action remains critical for the aussie. If the current rate of QE – some $120 billion/month holds up or even rises, the AUD would benefit. As long as America’s inflation remains subdued – and there is no guarantee due to potential post-covid supply issues – the greenback would stay depressed and AUD/USD would shine.”
“Instead of making Aussie-moving policy announcements, there is a higher chance that the RBA announces macro-prudential measures to curb rising house prices in Australia’s largest cities. It will be hard to stem the global tide in house prices, but demanding higher down payments, limiting foreign investment and being creative with other measures would substitute rate hikes and allow the Aussie to drop.”
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