NAB say Beware Australian Dollar Dip Near-term but Expect Gains in 2021

- AUD forecast higher in 2021
- But near-term weakness possible says NAB
- Tensions with China main risk to bullish outlook

Aussie Dollar

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The fundamental ingredients for a strong rally in the Australian Dollar in 2021 are in place say analysts at NAB, however near-term declines cannot be ruled out.

The latest foreign exchange forecasts and research from the Australian lender and investment bank shows that the Australian Dollar will likely extend higher in 2021, courtesy of an ongoing economic recovery.

But given the sizeable rise in November some give-back can be expected over coming weeks.

The Australian Dollar rose close 5.0% against the U.S. Dollar in November, with gains also coming against most other major currencies as investors found their appetite for high-yielding investments once more courtesy of three pharmaceutical companies reporting trials had shown their covid-19 vaccine candidates to be effective in preventing the illness.

Stock markets have rallied, as have commodity prices, as investors look to a more robust growth environment in 2021.

The Australian Dollar's positive correlation with investor risk sentiment - rising when stock markets and commodities appreciate in value - proved to be the ultimate driver of the currency's gains.

"Importantly for the AUD, the broad increase in risk appetite has also manifested itself in Credit and EM markets," says Ray Attrill, Head of FX Strategy at NAB.

Aussie Dollar models from NNAB

NAB are assuming the a successful global vaccine roll out will contribute to ongoing improvements in global investor appetite over coming months, which should in turn underpin the Aussie.

However, following the strong appreciation trend of recent weeks, some near-term weakness cannot be discounted.

"We are a little bit cautious at extrapolating a straight-line rise in risk appetite and the AUD... the currency’s performance straight after a big monthly gain is mixed with history showing the AUD appreciates only 47% of the time in the month after gains over 4.5%," says Attrill.

But research by NAB shows that sizeable gains by the Australian dollar at an early stage of a global economic recovery are not unusual, with the currency’s historical performance statistics showing monthly gains over 4.5% have more often than not (65% of the time) been followed by higher AUD/USD levels 3 and 6 months down the road.

The Aussie currency is meanwhile behaving as would be expected when screened on NAB's various models, raising confidence amongst analysts that longer-term gains are likely given current settings and expectations for the outlook.

"Our higher AUD/USD outlook with a point forecast of 78c by December 2021 remains well supported by fundamentals. Next year, risk appetite should be buoyed by a solid and broad-based global economic recovery. But importantly too, given our expectations for commodities to remain in demand, as China’s infrastructure led recovery continues to evolve, Australia’s terms of trade is also likely to remain elevated," says Attrill.

But there are risks to the bullish outlook for the currency to consider, namely that the diplomatic and trade spat with China escalates into something more serious.

"We cannot ignore recent events which effectively mean Australia-China diplomatic relations are now the worse they have been since the Whitlam government first established ties with China in 1973. Our assumption here is that China’s demand for Australia’s main commodity exports will remain solid next year. But if tensions escalate further from here, affecting demand for iron ore for instance and or a recovery in tourism and education, once international borders re-open, then inevitably the AUD will come under pressure," says Attill.

The pound-to-Australian dollar exchange rate is forecast at 1.85 by year-end through to the end of March 2021 ahead of a decline to 1.8181 by the end of June 2021. It is forecast to end 2021 back towards 1.85.

The Australian dollar-to-U.S. dollar exchange rate is forecast at 0.74 at year-end, 0.76 by the end of March 2021, 0.77 by mid-2021 and 0.78 by end-2021.

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