Currently the AUD is facing a fundamental valuation ‘crisis’ - as it battles with what is fair value and what is fair trading value - There are clearly competing factors.
Domestically the push factor is the ever-expanding thirst for commodities from the Asian region particularly China. The global rebound from the pandemic has been driven by infrastructure spending.
The 7-year high in iron ore and the surging price of copper is putting a rocket under the AUD/USD, something that is unlikely to subside in the coming quarter or even the first two quarters as the globe continues to battle the economic scares of COVID with almost unlimited spending.
The domestic pull factor is the RBA’s $100 billion quantitative easing program. However, we are now over halfway through said program and its effect on the AUD has been minimal at best. With the program due to expire in the next 3-4 months, its pressure will be released and the AUD will have no downward policy intervention at all, meaning further upside.
The caveat here is that if after the completion of the current QE program the Board believes further intervention is required to limit the AUD’s movement, they have stated they are willing to take on more QE intervention - but it’s clear the domestic macro factors are drowning out the domestic policy intervention.
Then, if we look internationally outside of the commodity demand, QE will be the theme of 2021. The US, Europe, the UK and Japan are all lining up to enact programs of their own. The size and scale from each central bank will overwhelm anything that the RBA puts out, meaning the AUD has an additional tailwind coming from its pair or cross.
According to Refinitiv’s latest survey of economists, the AUSD/USD is forecasted to reach $0.83 by year end with a $0.78 mid-year target. At $0.7767, that mid-year target is already in hand; momentum is strong and technically its upwards channel is unbroken on the daily chart. The caveat is that it is touching the upper channel, it is likely to revert to the mean ($0.768) when it’s sold off before it attempts to head for the $0.80 mark.
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