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The rally in the aussie is built more on solid fundamentals than speculative excess. This should mean the Reserve Bank of Australia (RBA) takes a hands-off approach. All in all, economists at HSBC expect the AUD/USD pair to rise further in 2021.

Key quotes

“The RBA has communicated its relative comfort with FX strength lately. In the minutes for the September monetary policy meeting, the central bank repeated its view that the rally in the AUD is in line with fundamentals, although it would prefer the AUD to be weaker (source: RBA, 15 September 2020). Overall, the rhetoric does not suggest that the RBA views the currency as misaligned.”

“The RBA’s balance sheet expansion has been modest by G10 standards and is shifting in composition away from bond purchases towards the recently expanded three-year Term Funding Facility, with the primary aim of lowering domestic bank funding costs. The RBA minutes for September also showed no sign that it plans to ease policy again over the short-term.”

“We do not see any warning signs of extreme speculative positioning. There are also strong signs that the recent AUD rally is in line with fundamentals. For instance, the price of Australia’s export basket of commodities has stayed relatively elevated and is now higher than at the start of the year. The rebound in economic activity in China, including infrastructure investment, bodes well for these bullish fundamentals to persist into 2021. Meanwhile, yield differentials have moved firmly in favour of the AUD, given Australia’s economic contraction has been less than that of peers.”