AUD/USD forecast: How low can the pair go before the next rebound?
07:07, 1 September 2021
The Australian dollar (AUD) to US dollar (USD) exchange rate shows how many USD are needed to buy one AUD. Known commonly as the Aussie, the Australian dollar is the official currency of the Commonwealth of Australia. It’s the world’s fifth-most traded currency, even though Australia’s gross domestic product (GDP) is the 12th largest.
The US dollar is the world’s reserve currency and has been so ever since the end of the gold standard in 1971. It’s the most traded currency.
According to the Bank of International Settlements, the AUD accounted for 7% of all daily forex transactions in 2019, while the USD accounted for 88.5%. The AUD/USD pair is one of the most popular on global currency markets.
What’s been driving the AUD/USD rate in 2021 and what’s the outlook as we head into 2022? We try to answer these questions through the latest analysts’ predictions and look at what to consider when trading the pair.
AUD/USD: Where is the pair now?
If you had fallen asleep on 27 August 2020 and woken up on 27 August 2021, you could be easily fooled into thinking the AUD/USD pair hadn’t moved. At 0.7244 on 27 August 2021, the AUD/USD is nearly flat compared to its value on 27 August 2020 (0.7243).
But the currency pair’s movement during the year has been anything but flat. From hitting a low of 0.6991 in late October 2020, the AUD/USD climbed to a high of 0.8007 at the end of February 2021.
While the AUD has been under severe downward pressure since mid-June, following the US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meeting, many analysts see support for the AUD/USD at the 0.7000 level after the Aussie fell 3.2% between 16 August and 20 August – the biggest weekly fall since September 2020.
In a note to clients published on 20 August, economists at ING suggested that the fall was down to the market pricing in key downside risks, and that a drop below 0.7000 was unlikely. Indeed, the AUD/USD recovered, ending the following week at 0.7243.
Jane Foley, senior FX strategist at Rabobank, wrote in a note that the Dutch bank sees more weakness in the AUD/USD over the next few months, but does not expect it to fall below 0.7000.
In the short term, experts see strong resistance at levels higher than 0.7250. “The AUD appears to be capped by key resistance between 0.7270 and 0.7290, though a close above that region would add to the risks of a further leg higher,” economists at Westpac wrote on 27 August.
AUD/USD analysis: key fundamental drivers
Commodity prices
Australia is the world’s major exporter of commodities. It’s the largest exporter of iron ore. It also exports large volumes of coal, liquefied natural gas, gold and uranium. As a result, its currency is closely linked to both energy and commodity prices. Given that a lot of its commodity exports go to China, the economic health of China plays a key role in determining the Aussie dollar’s value.
Much of the Aussie’s strength in the early part of 2021 came from soaring iron ore prices, which topped US$200 a tonne on expectations of a strong recovery in the global economy after COVID-19. Strong data from the Australian economy also provided support to the AUD.
Risk-on VS Risk-off
Due to its link to commodity prices, the AUD is seen as a riskier currency because commodity markets can experience dramatic swings. Typically, the Aussie dollar does well in a risk-on environment, when the global economy has a positive outlook.
The USD closely tracks developments in the US economy. It’s also a key safe-haven currency that investors flock to when global risk-off sentiment grows.
US Federal Reserve
Since June’s FOMC meeting, when the Fed revised its dot plot chart, the AUD has been under severe pressure. The revised chart shows that Fed officials expect two rate increases by the end of 2023, sooner than had been anticipated, suggesting a stronger US economy. The AUD has fallen 8% over the last three months amid expectations that the Fed would announce a path to tightening.
“The Aussie has really struggled since the June FOMC meeting. Periods of broad USD strength are usually quite negative for the Aussie,” Sean Callow, senior currency strategist at Westpac,
told Capital.com
Reserve Bank of Australia
The Reserve Bank of Australia (RBA) has expressed a more dovish stance, which, according to Sally Auld, chief investment officer at National Australia Bank-backed wealth manager JBWere, could be a reason for the Aussie’s weakness.
“In Australia, the Reserve Bank retains a narrative that interest rates will not rise until 2024; a forecast that has received additional support from a much weaker near-term growth outlook for the domestic economy,” Auld said in a note published on 24 August.
“The upshot is that interest rates in other countries are rising relative to interest rates in Australia, which acts as another headwind for the currency.”
Slower Chinese growth
Auld noted other key reasons for the AUD weakness, such as slower economic growth in China. “Slower Chinese growth and curbs on domestic steel production in China have pressured the Australian dollar – and the commodity complex – lower in recent months,” Auld said.
Delta variant fears
The spread of the Delta variant of COVID-19 has disrupted the near-term economic outlook for Australia as the country grapples with multiple lockdowns.
According to Auld, the country had more to lose than most of its economic peers amid the combination of a strong economy and low vaccination rate, with some forecasts suggesting the Australian economy could contract by around 2.2% in the quarter.
“In contrast, the spread of the Delta variant in other countries has not generated strong responses from governments. Consequently, the growth outlook in these countries is not impacted as severely as it is in Australia,” Auld said.
“This divergence in near-term growth prospects between Australia and its economic peers has also worked against the AUD in recent months, in our view,” Auld concluded.
Westpac’s Callow supports Auld’s view. “In addition the stronger USD, the somewhat cautious Reserve Bank of Australia (RBA) and its modest tapering of quantitative easing that starts in September is not helping the AUD too much,” Callow told capital.com.
“A deepening COVID-19 lockdown crisis in much of Australia is adding to pressure on the Aussie,” he added.
AUD/USD: What are the analysts saying?
Short-term AUD/USD forecasts
The mood in the markets is largely bearish in the near term. Any uncertainty is largely down to the impact of COVID-19. Lockdowns, which began in early June, have continued and in some states have even been made stricter.
According to Westpac’s Callow, the Aussie’s recent underperformance has been “buffeted” by deepening COVID-19 struggles that have weighed on the country’s economic outlook. “Westpac lowered its third-quarter Australia GDP forecast to -2.6%, which would leave annual growth at only 2.4% even if the economy opens up again in the fourth quarter,” he wrote in a note.
Callow pointed out that Australia’s official data is only just starting to show the impact of recent lockdowns – underemployment spiked to 8.3% in July, which, according to Callow, is a better guide to the job market than the 4.6% headline unemployment rate that fell largely because people were unable to look for jobs amid lockdowns.
Rabobank’s Foley reiterates the argument. “Given the worsened economic outlook, the market largely dismissed the better than expected jobs report for July as old news,” Foley said in a note to clients.
“In mid-July, we revised our year-end forecast for AUD/USD to 0.72 based on expectations of a stronger USD and that the RBA would be a laggard on tightening. The worsening in news surrounding the AUD has already taken the pair below that level,” Foley added.
Analysts at Citibank expect pressure on the AUD to continue in the short term. “Citi Research now believes that the RBA will maintain purchasing bonds at AU$5bn per week until the first quarter of 2022 when the recovery is expected to resume as the economy reopens… Add to this the China slowdown story, this leaves AUD with limited upside potential versus the USD and more headwinds versus its peers,” Citibank said in a note to clients.
According to Westpac’s Evans, the AUD/USD exchange rate forecast for the end of 2021 is 0.75. Westpac had previously forecast the currency pair to reach 0.78 at the year-end.
According to a forecast poll of 33 analysts for FXStreet, the one-month rate target for AUD/USD is 0.7352, with 54% bullish and 35% bearish. The quarterly AUR/USD outlook for the pair is 0.7424, with 58% bullish and 29% bearish.
Note that analysts’ predictions are often wrong. You should always conduct your own research before making any investment or trading decision.
AUD/USD analyst forecasts; Source: FXStreetMedium-term AUD/USD forecasts
Despite the pessimism, longer-term expectations point to a sustained recovery after 2021, underpinned by past experience.
Australia’s economy was one of the quickest to recover after the first round of lockdowns in 2020, which resulted in strong economic data coming through in the early part of 2021. Housing prices and inflation started to rise, while unemployment came down. Some had even predicted that the RBA may need to start hiking interest rates earlier than its own projections.
But then came the spread of COVID-19, which sent economists scurrying to revise Australian growth forecasts for the third quarter of 2021. But RBA governor Philip Lowe is confident that once COVID-19 is under control, economic recovery will be quick.
“The experience both in Australia and elsewhere is that once restrictions are lifted, spending recovers strongly, especially if people have confidence about the future. While the exact timing of the bounce-back is difficult to predict, it is likely to start well before the end of the year,” Lowe told Australian lawmakers in early August.
Rabobank’s Foley sees recovery setting into the AUD by next year. JBWere’s Auld said the AUD/USD will trade in a 0.71–0.75 range till the year-end, and “eventually, Australian growth prospects will improve as vaccination rates increase and lockdowns come to an end”.
Meanwhile, Westpac's Evans expects the AUD/USD to rise to 0.78 in 2022 and to 0.80 by 2023.
“The dominant global theme for 2022 and 2023 is increasing vaccination rates backed by record fiscal and monetary stimulus (albeit with some scaling back); and strong household
balance sheets boosted by high asset prices will favour ‘risk on’ currencies,” he wrote in a note.
Note that analysts’ predictions are often wrong. You should always conduct your own research before making any investment or trading decision.
AUD/USD, reasons to go short, longWhether you go long or short is your decision. Always remember that your decision to trade depends on your attitude to risk, conducting your own research, your expertise in this market, the spread of your investment portfolio, and how comfortable you feel about losing money. Don’t invest money you cannot afford to lose.
AUD/USD: historic movement
Before COVID-19, the AUD/USD was largely driven by commodity prices, Chinese growth prospects and the US economy.
Between 2018 and 2019, the AUD lost ground to the USD as Chinese economic growth prospects were threatened by the US-China trade war. The Aussie faced the heat as former US President Donald Trump's administration imposed trade tariffs on China. The uncertainty pushed investors towards safe-haven currencies, including the USD. The AUD fell 18.24% between 22 January 2018, when Trump imposed tariffs on several Chinese goods, and 2 March 2020.
The fall of the AUD/USD was exacerbated after the outbreak of Covid-19 in March 2020. Investors immediately switched towards risk-off currencies such as the USD. The AUD/USD fell 12.5% between 2 March 2020 and 16 March 2020 to around 0.58, a level even lower than that in the immediate aftermath of the global financial crisis of September 2008. In the months leading up to the global financial crisis, the AUD/USD closely tracked the global crude oil movements and fell sharply, beginning in July 2008, as oil prices fell from their peak.
In 2020, as Australia quickly brought Covid-19 cases under control and China’s economy rebounded, which helped send commodity prices high, the AUD gained ground against the USD. The AUD/USD peaked at 0.8007 in late February.
But the good times for the AUD were short-lived as COVID-19 returned with a new variant. As mentioned previously, the AUD has been slipping since May as talk of the US Fed’s tapering gathered momentum even while the first cases of the Delta variant were reported in Australia. As a result, the fall in the AUD’s value versus the USD has been the steepest since 2018.
Looking at the historical data of AUD/USD, it’s been rare for the pair to trade for a sustained period below its current level of 0.72.
Since April 1994, we can see three broad periods where the currency pair was below 0.72 for a sustained period: between August 1997 and November 2003; between October 2008 and April 2009; between January 2019 and July 2020; and finally between September 2020 and November 2020.
According to Auld, in the last 15 years, the AUD/USD has only spent 11% of its time trading below the 0.70 level.
AUD/USD historical chart; Source: Tradingview Will AUD rise against USD?
The AUD/USD one-month rate target is 0.7352, according to a poll by FXStreet, while the one-quarter target is 0.7424, suggesting a potential upside.
Is USD stronger than AUD?
Broader USD strength has been pressuring the AUD/USD pair amid the hawkish shift from the US Federal Reserve in June signaling that a rate hike may come sooner than expected.
Is AUD/USD buy or sell?
There may be numerous reasons to go long on AUR/USD, for example, the optimistic mid-term forecasts and the fact that Australia has quickly recovered the first series of lockdowns. There may be reasons to go short on the AUR/USD such as fears over the Delta variant, China’s economic strength, and the RBA’s dovishness.
Whether you buy or sell is your decision. Always remember that your decision to trade depends on your attitude to risk, conducting your own research, the spread of your investment portfolio, and how comfortable you feel about losing money.
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