Nicole WillingThe Australian dollar (AUD) has made strong gains against the US dollar (USD) since the March lows in the financial markets. The Aussie, as it is often called, has risen by 28 per cent against the US currency since March as the US economy remains under pressure. Meanwhile the Australian currency has been supported by an improving Covid-19 outlook and economic recovery in China.
The Aussie is largely driven by the economic performance of China, its largest trading partner, as well as commodity markets, given that mining accounts for a large share of its domestic economy. The US dollar is the world’s reserve currency and responds not only to developments in the US economy but also global macroeconomic factors and financial markets. That creates volatility in the Australian dollar to American dollar currency pairing, providing great opportunities for investors to generate profits.
This AUD/USD analysis offers an overview of the factors influencing the pricing of the pair’s exchange rate, reviews its recent performance and looks at analyst forecasts for this forex giant heading into 2021.
The basics: what investors need to know about the AUD/USD pair
The AUD vs USD currency pairing represents how many US dollars are needed to purchase one Australian dollar. The US dollar is the world’s most traded currency, while the Australian dollar ranks fifth. Currency traders use the Aussie as a proxy for taking positions on the Chinese economy, as China is Australia's largest export market.
The AUD/USD pair is one of the most actively traded on the currency markets, particularly given the fraught trading relationship between the US and China that has resulted in a trade war in recent years.
Factors that influence the value of the AUD/USD pair
When trading currency pairs, investors need to be aware of the factors that drive the values of each currency and how those currencies relate to each other. Some of the data investors should watch includes US and Australian inflation rates; US, Australian and Chinese GDP; Chinese manufacturing index figures; and commodity prices.
Central bank policy decisions have become an increasingly important driver for the currency markets in an environment where interest rates around the world are at record lows and governments are pumping money into their economies in an attempt to stimulate business activity.
AUD/USD price analysis: the pair rebounds in line with risk appetite
The exchange rate started the year at 0.70 and fell to 0.57 in March when investors sold off their assets at the start of Covid-19 lockdowns and bought the US dollar as a safe haven. The pair subsequently rebounded over the summer reopening period to reach 0.74 by September.
The AUD/USD trend came under pressure ahead of the US election on November 2, slipping back from 0.71 to below 0.70 as traders reduced their risk given uncertainty about the outcome. The Australian dollar has since recovered to approach its two-month high of 0.74 on improving risk sentiment.
The latest Reserve Bank of Australia (RBA) minutes failed to move the market as they contained little news to drive the AUD in either direction. The RBA cut interest rates to 0.1 per cent, but the central bank Governor had already indicated in October that the cut was to come, and that projection was already priced into the market. The RBA has launched a A$100bn (£55bn; $73bn, €62bn) asset purchase programme, but has so far ruled out negative rates.
While Covid-19 cases continue to rise in the US and Europe remains under restrictive measures, Australian case numbers have been falling and restrictions are being relaxed, which is positive for the Aussie currency.
The flash November US Markit purchasing managers’ index (PMI) surveys came out stronger than expected given the rise in Covid-19 cases in the US. The US services PMI was 57.7, above the 55 analysts had expected and the 56.9 figure recorded in October, suggesting that the services sector is improving at a faster rate.
But while the PMI figures were bullish for the US dollar, news that US President-elect Joe Biden is set to pick former Federal Reserve head, Janet Yellen, as the Treasury Secretary for the incoming administration was bearish given her previous stance against a strong dollar and focus on employment figures rather than inflation.
So, what do the latest developments suggest for the AUD/USD outlook heading into 2021?
AUD/USD forecast 2021: will US policy drive the American dollar lower against the Aussie?
Analysts expect that US government policy aimed at reviving the economy is likely to weigh on the US dollar well into 2021, while a stronger recovery in China and Australia will likely support the Aussie dollar.
John Hardy, the head of FX strategy at Denmark’s Saxo Bank, said: “The long term implications of the Yellen nomination are distinctly USD negative.”
“Some key questions do remain about the ability of a Biden administration to ram through its agenda, given the ‘power of the purse’ resides with Congress, where the US Senate will remain in Republican control... The next step for the bulls here is a clearing of the 0.7414 high for the cycle, which opens up considerable open terrain on the chart toward 0.8000+.”
Analysts at French bank BNP Paribas expect the pair to remain stable over the next year. They explained in the bank’s latest AUD to USD forecast: “The Chinese economic recovery also remains a key factor for the AUD via the positive impact on base metal prices. We believe that most of these drivers have been priced by the market and we see the AUD/USD hovering around current levels, 0.73 over the next three and 12 months.”
However, analysts at US-based Citibank are more bullish: “Given the RBA’s seeming unwillingness to cut into negative territory, it is unlikely that monetary policy will be a significant negative catalyst for the currency.
Overall, Citibank economists “now believe for the first time since the pandemic, that the risks to future activity are to the upside in Australia”. The bank has a three-month AUD/USD forecast of 0.74, rising to 0.76 for six-12 months out and a long-term forecast of 0.77.
On the other hand, Wallet Investor, an online forecasting service, sees the pair falling in the months to come. According to it, the AUD/USD rate will end 2021 at 0.69 and plunge lower to close 2022 at 0.65. By November 2025, the service expects the pairing to dip as low as 0.56.
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