- AUD forecast to rally in second half of the year
- This would create further pressure on GBP/AUD
- RBA tipped to keep AUD capped for now
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The Reserve Bank of Australia's hefty intervention in the country's bond markets are likely to keep a lid on the Australian Dollar over coming weeks, but by the second half of the year the currency should resume its uptrend according to new analysis.
Research from global financial services provider Commerzbank shows an expectation the Aussie Dollar would stand to benefit were the global vaccination race start to catch up with the covid-19 virus, which would allow for an expansion of the global economic rebound to which the Aussie Dollar is positively aligned.
Antje Praefcke, FX and EM Analyst at Commerzbank says the Australian Dollar is likely to weaken in the coming weeks but, "from the second half of the year, however, the AUD should see a comeback".
Predictions of an Australian Dollar rebound will worry GBP/AUD bulls given the exchange rate has fallen for two weeks in succession now, amidst ongoing Aussie Dollar resilience which raises questions as to whether the recovery action of the first three months of 2021 has already run out of steam:
Above: GBP/AUD daily chart showing the recent fading of the 2021 rally.
The Pound-to-Australian Dollar exchange rate starts the new week softer by going down 0.20% to trade at 1.7844 at the time of writing.
The move follows a 0.64% decline recorded in the previous week.
More broadly, the Australian Dollar has advanced against then majority of the world's largest currencies over the past week, but over the past month it has actually seen a more mixed performance.
Concerning the outlook for coming weeks, Commerzbank tell clients upside should be limited by the Reserve Bank of Australia (RBA) which remains in activist mode by buying up the country's sovereign bonds in order to keep a lid on the yields those bonds pay.
By capping the rise in yields they are effectively keeping a lid on the cost of finance in the economy more generally, and providing a necessary cushion for businesses in times of uncertainty.
But, by capping yields the RBA is also depriving the Australian Dollar of demand from foreign investors who would normally hunt out higher yields.
Commerzbank says the RBA should remain in activist mode for some time yet as policymakers at the RBA expect wage and inflation pressures to remain subdued for some years.
"It thinks the economy is operating at considerable spare capacity and unemployment is still too high," says Praefcke. "Except for temporary price increases, inflation will only rise very slowly."
GBP/AUD Forecasts 2021
Period: Q2 2021 Onwards
FX for Businesses Guide
Commerzbank says that with the rest of the world's major central banks engaged heavily in both quantitative easing and record-low interest rates, the RBA will have little choice but to do the same.
Were the RBA to bring an end to Australia's quantitative easing programmes and hint at higher rates in the future, they risk pushing the Aussie Dollar higher and building further financial headwinds for the economy.
"That in turn might put the brakes on the recovery and a return of inflation levels into the target corridor," says Praefcke.
The RBA is expected to maintain an activist approach to bond markets and could be required to introduce a third quantitative easing programme by mid-year to ensure the country's yields and currency remain under control.
"It is likely to want to prevent renewed taper speculation from arising in the near future, which could cause the AUD to appreciate," says Praefcke.
"The extension of the bond purchasing programme until the end of the year and the RBA's courageous intervention against the rise in yields at the end of February is likely to limit the AUD's upside potential in the coming months," she adds.
However, into the second half of the year the currency's trend of appreciation that characterised much of 2020 is expected to restart.
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The U.S. Federal Reserve is expected by economists at Commerzbank to remain in an ultra-accommodative mode, thereby ensuring U.S. yields remain under pressure and the U.S. Dollar depreciates.
A falling U.S. Dollar and U.S. yields are in turn helpful for global economic growth, to which the Australian Dollar is positively aligned.
"The AUD should benefit from the global economic recovery in the wake of increasing vaccinations worldwide and resume its upward trend," says Praefcke.
However, Commerzbank research makes no mention of any potential risks arising later in the year when the market realises just how far behind the rest of the world Australia is when it comes to rolling out vaccines.
We have noted in a number of articles that the vaccination programme in Australia is currently negligible in scale and the country's heavy reliance on the AstraZeneca vaccine further complicates the outlook of the rollout.
Australia's zero covid policy might have benefited the country in the first stage of the pandemic but markets are already pricing currencies according to the second stage of the pandemic which involves the vaccination of the world's population.
The risk of the country's borders staying closed for a longer period than other G10 countries tries means economic growth stays below full potential for longer.
Another potential risk to consider is the prospect of commodity price controls being introduced in China.
We reported last week that senior Chinese leaders had started signalling the potential for such controls to be brought in and noted the Australian Dollar would be sensitive to such measures.
This is due to the Australian economy's heavy resilience on the export of raw materials, notably iron ore.
Controls on iron ore prices would understandably impact negatively on Australia's foreign balance and potentially deprive its currency of a fundamental leg of support.
For now the Chinese appear to be sabre rattling and testing the idea, but were they to believe it is a runner the positive thesis for AUD in the second half of the year might requestioned by markets.