The Australian dollar has been a roughly midrange performer relative to other major currencies this year, falling initially and sharply in response to covid fears, before recovering solidly and extending toward the year’s highs in recent weeks. Overall, there are reasons to be optimistic regarding the Australian economy and AUD over the medium-term, according to economists at CIBC.
Key quotes
“Over the medium to longer-term, assuming any further covid outbreaks can be tamped down without a major economic disruption now that community case counts are low, we are constructive on prospects for outperformance of the AUD against the USD and on crosses including versus CAD and JPY.”
“We now see the RBA on hold for an extended period, although the initial A$100 B of bond purchases may be increased in future periods, and as discussed above the RBA has ample room to do so.”
“Amongst challenges for the AUD, a deterioration in trade and political tension with China is the most concerning. Chinese economic activity, including trade, has rebounded strongly, but trade with Australia has not. While Chinese imports from Australia did recover on a YoY basis in October, they are still 6.1% lower year-to-date than in the same period of 2019.”
“A change in the US administration may benefit Australian trade to some degree, as some of the weakness seen in recent months appears to be the result of substitution of agricultural products to satisfy the phase one trade deal. For now, Australia’s trade surplus is healthy, and the lack of inward tourism or education spending is being neutralized by a lack of outbound travel. Still, this is an area of some caution and bears ongoing attention.”
“Low COVID-19 case numbers relative to North America and Europe should mean an earlier rebound in economic activity. Meanwhile, strengthening global risk sentiment as vaccines begin to be rolled out, a yield advantage over other developed countries even after recent RBA action, and a modest current account surplus are reasons to be optimistic on the AUD. While some risks remain, including relations with China, the housing market and environmental concerns, for now, things appear to be looking up, down under.”
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