The AUD rally stalled since the start of 2021 after a strong run last year. The dip in the AUD can be explained by the shock of ‘risk up, (US) rates up’ of early January, followed by the equity volatility shock of late January and, more recently, the surprise easing by the Reserve Bank of Australia (RBA). However, the risk-friendly global backdrop, higher commodity prices and a domestic economic upswing now underway should support a stronger AUD. We see AUDUSD getting to 0.83 in a year’s time.
Despite the rocky start to the year, AUD’s high sensitivity to risk sentiment suggests that the currency should continue to benefit from global reflation optimism. For many investors, the premise for the reflation optimism is underpinned by the idea of a progressive vaccine rollout releasing pent-up consumer demand, coming US fiscal expansion, and a Federal Reserve that is apparently more than prepared to let the US economy run hot.
Rebounding consumer and business sentiment points to a stronger Australian economy
Source: NAB, WBC-MI, Bloomberg, Bank of Singapore
Australia’s adept handling of the Covid-19 crisis means that the country has been able to return to relative normality faster compared to most Western economies. Substantial government transfers have boosted household savings, which should allow consumer spending to ramp up further as restrictions ease and more services become available. A domestic upswing is underway and will be supported by a vaccine rollout from February. An indication of a stronger Australian economy comes from consumer and business sentiment, which has rebounded to a decade high.
It is positive that Australia has commodities to export and that production has not been disrupted by the pandemic. The level of commodity prices suggests more AUD upside. Sharply rising export commodity prices such as iron ore should provide sizeable support for the AUD. Rising commodities prices are not only supporting Australian growth but are also moving Australia away from structural current account deficit to surplus.
The level of commodity prices suggests more AUD upside
Source: Bloomberg, Bank of Singapore
Our base case is that Australia’s stronger external position will not be seriously undermined by: (1) geopolitical tensions between Australia and China and (2) China’s credit policy turning more neutral given the country’s strong V-shaped recovery. The slower pace of China’s total social financing (TSF) and M2 YoY growth in January was expected – and is both understandable and appropriate to China’s economic circumstance. Despite a peaking of China’s credit impulse, a catch-up in US commodity demand on prospects of higher infrastructure spending and the drive towards cleaner energy globally, which will benefit industrial metals, should continue to support commodity prices and the AUD.
We view the RBA’s surprise easing – by extending its Quantitative Easing program by a further AUD100 bn over six months -- as leaning against significant AUD upside, rather than trying to weaken it. We do not see this as a major headwind for the AUD.
Important information
This product may only be offered: (i) in Hong Kong, to qualified Private Banking Customers and Professional Investors (as defined under the Securities and Futures Ordinance); and (ii) in Singapore, to Accredited Investors (as defined under the Securities and Futures Act) and (iii) in the Dubai International Financial Center to Professional Clients (as defined under the Dubai Financial Services Authority rules) only. No other person should act on the contents of this document.This product may involve derivatives. Do NOT invest in it unless you fully understand and are willing to assume the risks associated with it. If you have any doubt, you should seek independent professional financial, tax and/or legal advice as you deem necessary.
Please carefully read and make sure that you understand all Risk Disclosures, Selling Restrictions, and Disclaimers. This document must be read together with the relevant Prospectus & Offering Documents &/or Key Fact Statement.
Disclaimer
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information purposes only, and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. It is not an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice or by itself a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from its professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any clients. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. Any such client is responsible for consulting his/her own independent advisor as to the tax, accounting and legal consequences associated with his/her investments/transactions based on the client’s particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
