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AUD/USD forecast: Will China’s economic recovery lift the Australian dollar out of its slump?

By Fitri Wulandari

Edited by Alexandra Pankratyeva


Updated

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In this article:
AUD/USD
AUD/USD
0.70003 USD
-0.006 -0.850%
Natural Gas
Natural Gas
2.687 USD
-0.006 -0.220%
Wheat
Wheat
- USD

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US and Australian dollar bills
The Aussie has regained some of its strength against the US dollar – Photo: RomanR / Shutterstock.com

The Australian dollar (AUD) recouped some of its losses against the US dollar, as indications that US Federal Reserve could slow the pace of its interest rate hikes softened the US dollar.

The AUD appreciation came as the Reserve Bank of Australia (RBA), the country’s central bank, also slowed the pace of its interest rate hikes despite soaring inflation.  

The Fed’s recent dovish tone and RBA’s softening monetary policy were fresh headwinds for the AUD/USD, which has already been under pressure from China’s slowing economic growth. Chinese demand for Australia’s key commodities has been softening as Covid-19 restrictions put a brake on the country’s economic growth.

However, recent reports that China will end its two-year ban on Australian coal supported the currency. Will China’s economic recovery help the currency maintain its upward trend?

What is AUD/USD?

The Australian dollar (AUD) is one of the world’s major currencies. According to the Bank for International Settlement, Australia’s official currency – which is often known by its ‘Aussie’ nickname – is the world’s fifth most-traded currency, accounting for 6.8% of daily trades. 

AUD/USD is the Australian dollar and US dollar currency pair. It reflects how many US dollars are needed to buy one Australian dollar.

For example, if the AUD/USD exchange rate is 0.69, this means that $0.69 (or 69 US cents) can be exchanged for a payment of AUD1 (or $1 Australian). When the value of the Australian dollar rises in comparison to another currency, it ‘appreciates’. It ‘depreciates’ when its worth declines. 

Several factors can influence the value of the Australian dollar and the US dollar in relation to one another. The Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) of the United States’ respective interest rate policies can cause the currency pair to rise or fall. Economic variables can also influence the value of a currency pair. 

Commodity prices can also have an impact on the AUD/USD pair’s movement. Natural gas, iron ore, coal, and agricultural commodities such as wheat are key exports for Australia, and variations in commodity prices have an impact on export pricing. As a result, changes in commodity prices can affect the strength of the Australian dollar. 

Higher commodities prices may boost demand for Australian dollars to purchase Australia’s commodities exports, resulting in the strengthening of the Aussie. That is why the Australian dollar is known as a “commodity currency”.

Rising commodity prices may also entice exporters to invest in increasing output capacity. The investment is often funded by money moving into Australia from elsewhere, which boosts demand for Australian dollars.

China, Australia’s largest trading partner, also has an impact on the AUD. The world’s second-largest economy is a major importer of Australian commodities. When China’s economy grows, the value of the Australian dollar rises; when Chinese demand falls, prices decline and the Australian dollar falls.

AUD/USD historical performance 

AUD/USD plunged to the 0.58 level in March 2020, at the onset of the Covid-19 pandemic, as investors switched to safe-haven investments on concerns about the impact of the pandemic on the country’s commodity exports. An AUD/USD chart showed that the last time the pair traded at such a low level was in 2001-2002.

However, the Aussie managed to recover and proved resilient despite escalating trade tensions with China, which led to China banning Australian coal. The forex pair gained more than 9% in 2020. 

Entering 2021, the AUD/USD started strong, briefly hitting an intraday high of 0.80 on 25 February 2021. But it gave up its gains since then and continued its descent for the rest of the year. The currency pair lost about 5.6% during 2021. 

AUD/USD price performance, 2017-2022

What’s been driving AUD/USD recently?

The AUD/USD experienced some volatile trading in 2022, but it was mostly pointing downward. The Australian dollar’s value versus the US dollar continued its downward trajectory into 2022, but its appreciation in the last two months of 2022 narrowed its losses.

As of 6 January 2023, the AUD/USD was trading around 0.6741. The currency pair has gained 4.94% in three months, but it has lost 1.29% year-to-date (YTD) and 6.79% in one year.

The pair opened at the 0.71 level at the start of the year and continued its ascent, crossing 0.75 in April, boosted by rallying commodity prices. The war between Russia and Ukraine, and the ensuing sanctions on Russia’s energy and commodity exports, have raised concerns about supply. 

The Aussie, however, gave up its gains against the US dollar following a slew of headwinds. 

The Fed’s more hawkish monetary policy put downward pressure on the Aussie. Since March, the Fed has signalled aggressive rate hikes to tame soaring inflation, partly driven by rising domestic prices. However, the Fed has softened its tone in recent weeks, suggesting a slower pace of rate hikes. The Fed implemented seven rate hikes in 2022, lifting its benchmark funds rate target to 4.25%-4.50% in December 2022, and from 0.25% to 0.50% in March.

The higher US interest rates rise compared to Australian interest rates, the greater the demand for US dollars, while demand for Australian dollars decreases. Hence, the value of the Aussie has declined. 

Commodities demand to offer support

The price of spot iron ore, Australia’s top commodity export, has rallied in recent months to $115 per tonne as of 6 January. The steel-making ore has dropped about 29% from its highest 2022 price of $161.40 in early April, but it has risen 20.44% in the past three months, according to Market Index data.

Australia may see an upside from oil and natural gas prices, the country’s second- and third-largest exports, according to ING Group’s global head of markets and CEE Chris Turner and FX strategist Francesco Pesole.

Oil prices have retreated from above $100 per barrel in March, but remained elevated at $79/barrelNatural gas prices, on the other hand, have been falling to the level before Russia invaded Ukraine as Europe has stocked up ample supplies, and as demand softened amid milder winter weather – except for December’s cold snap.

“Here, we see clearly more upside room for prices, especially on the natural gas side. On balance, we expect the commodity picture for Australia to be rather constructive next year, which could offer a buffer to the Australian economy during the downturn,” Turner and Pesole wrote on 16 November 2022.

Resumption of China’s imports of Australian coal may help to strengthen the Aussie.

EUR/USD

1.08 Price
-0.170% 1D Chg, %
Long position overnight fee -0.0106%
Short position overnight fee 0.0015%
Overnight fee time 22:00 (UTC)
Spread 0.00006

GBP/USD

1.23 Price
-0.420% 1D Chg, %
Long position overnight fee -0.0063%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00013

GBP/JPY

160.39 Price
-0.440% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.027

AUD/USD

0.70 Price
-0.850% 1D Chg, %
Long position overnight fee -0.0079%
Short position overnight fee 0.0000%
Overnight fee time 22:00 (UTC)
Spread 0.00006

On 4 January, Reuters reported that China’s state planner has allowed three central government-backed utilities and its top steelmaker to resume coal imports from Australia. It was the first move since China imposed an unofficial ban on coal trade with Australia in 2020.

Among commodity currencies, there is scope for differentiation, with the AUD’s robust long-term structural drivers weighing against the higher carry returns of the NZD. We expect the AUD to be an outperformer in 2023,”ANZ Research noted in its outlook in December 2022.

Australia’s Office of the Chief Economist (OCE) forecast coal exports value to rise to AUD 75.6bn in the fiscal year 2022/2023, from AUD 49.57bn in 2021/2022.

Risks from China’s subdued economy persist

Over 2022, the Australian currency faced pressure from China’s economy, which was dealing with a new surge of Covid-19 cases and imposing lockdowns. 

China’s National Bureau of Statistics (NBS) announced on 25 October 2022 that its Gross Domestic Product (GDP) grew by 3.9% in Q3 2022 year-on-year, rebounding from 0.4% in the second quarter of 2022. However, that was still slower than 4.9% in the third quarter of 2021 and 4.8% in 2020, according to the NBS.

China’s dismal economic growth has been partly self-inflicted, due to its reluctance to loosen its grip on the zero Covid-19 policy.

“When it comes to AUD, the China factor will remain very central, as Australia has the most China-dependent export machine in the G10. Our economics team’s baseline scenario is that the real estate crisis will be the main drag on growth in China and while retail should recover on looser Covid rules, slowing global demand should hit exports,” ING’s Turner and Pesole added.

However, the country’s economy was expected to rebound in 2023 after all Covid-19 restrictions were lifted, including the reopening of its border to international arrivals on 8 January 2023.

“China’s economy will likely bottom out in 2023, due to Covid reopening and property support policies. But external demand is likely to be falling,” ANZ Research analyst Raymond Yeung wrote on 16 December.

ANZ Research forecast China’s economy to grow 5.4% in 2023, from 2.4% in 2022, before slowing to 4% in 2024.

Headwinds from RBA’s tightening cycle

At home, the Aussie is facing headwinds from RBA’s monetary policy to contain inflation and fears of recession. On 6 December 2022, RBA hiked the cash rate target by 25 basis point (bps) to 3.10%. It was the eighth rate hike since the bank kicked off its tightening cycle in May.

“The Reserve Bank of Australia has been one of the ‘pioneers’ of the dovish pivot, and a return to 50bp increases seems unlikely, as the Bank is probably monitoring the rather overvalued housing market, and the inflation picture is less concerning than in the US or in Europe,” Turner and Pesole said.

They expected RBA’s rate to peak at 3.6%, which would be below the Fed’s rate of 3.75%-4% and the Reserve Bank of New Zealand’s (RBNZ) interest rate of 4.25%. RBA was projected to hike its policy rate by 25bp in its meeting in February 2023.

“This would mean a less attractive carry – and less upside risk in an optimistic scenario for global sentiment; but also less damage to the economy, which may play in AUD’s favour in our baseline scenario,” Turner and Pesole said.


Consumer Price Index (CPI) inflation soared to an annual rate of 7.3% in the September quarter, the highest since 1990, according to the Australian Bureau of Statistics. The monthly CPI rose by 6.9% in the 12 months to October, the ABS announced on 30 November.

On 19 December, Westpac Bank confirmed its forecast that RBA would lift its policy rate to 3.85% by May 2023 on high inflation readings. The bank forecast the inflation rate for the December 2022 quarter at 7.5% and for the March 2023 quarter at 6.6% (6.5% underlying).

“While these numbers indicate that inflation is slowing, mainly because of easing supply side pressures, the Board will be cautious given that wage increases will be intensifying in the first half of 2023 and some components of inflation – particularly services – will remain a challenge while the need to anchor inflationary expectations in the face of such high inflation prints will be ongoing,” Westbank’s chief economist Bill Evans wrote on 19 December.

AUD/USD forecast: Price target for 2022-2025

Let’s take a look at the latest Australian dollar to US dollar forecasts from analysts.

As of 6 January 2023, economic data provider Trading Economics, in its AUD/USD forecast, estimated the currency pair to trade at 0.67 by the end of the first quarter of 2023, falling to 0.63 in a year’s time.

ANZ Research’s Australian dollar to US dollar forecast on 19 December saw the currency pair to trade at 0.70 by December 2023, up from 0.65 in March. It was predicted to rise to 0.75 by December 2024

CIBC Capital Markets was rather bullish in its AUD/USD forecast on 25 November. It expected AUD/USD to trade at 0.63 in Q4 2022 and rise to 0.64 in Q1 2023. The pair may stabilise until Q2, before gradually rising to 0.66 in Q4 2023 and 0.69 in Q4 2024 as the currency is supported by a narrowing or weakening gap with the US interest rate.

ING Group predicted the currency pair to rise modestly within two years. As of 9 December, the Dutch multinational lender forecasted the AUD/USD pair to trade at 0.69 until the first quarter of 2023. The currency pair was priced at 0.70 in the second quarter of 2023, rising to 0.72 in the final quarter of 2023 and steady until Q1 2024. The pair was then projected to gradually decline to 0.70 by Q4 2024 and 0.68 by Q4 2025.

As of 19 December 2022, Westpac Institutional Bank suggested in its AUD/USD forecast for 2023 that the pair could trade at 0.74 by December 2023, rising to 0.77 by December 2024.

Banks and financial institutions do not typically make AUD/USD predictions beyond 2024. However, algorithm-based forecasting services, such as Wallet Investor, can generate a five-year forecast for AUD/USD using the currency pair’s historical data.

Wallet Investor, in its Australian dollar to US dollar forecast, said the forex pair could be a “not so good long term (one year) investment”. At the time of writing on 6 January 2023, the forecasting service expected AUD/USD to trade at 0.685 by December 2023.

In its AUD/USD forecast for 2025, it expected the forex pair to reach 0.695 in December 2025, rising to 0.7053 by January 2028. Wallet Investor did not provide an AUD/USD forecast for 2030.

Note that analysts’ and algorithm-based AUD/USD forecasts can be wrong, and should not be used as a substitute for your own research. Always conduct your own due diligence before investing, and never trade money you cannot afford to lose.

FAQs

Why has AUD/USD been dropping?

The value of the Australian dollar and other major currencies has dropped against the strengthening US dollar as the Fed has continued its aggressive rate hikes.

In addition, China’s economic growth has been slowing, which could reduce demand for Australia’s key commodities such as iron ore and coal.

Will AUD/USD go up or down?

Analysts mentioned in the article expected AUD/USD to rebound at the time of writing on 6 January 2023. However, AUD/USD projections from analysts and forecasters can be wrong.

Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own research before trading, and never trade money you cannot afford to lose.

When is the best time to trade AUD/USD?

Technically, you can trade currencies around the clock. However, there are certain time slots when forex trading is most busy. This usually occurs between 19:00 and 04:00 GMT (UT), when the middle of the Asia-Pacific trading session and late US trading hours coincide.

Note that the AUD/USD pair’s volatility often increases whenever significant macroeconomic data is released or new central bank policies are unveiled.

Is AUD/USD a buy, sell or hold?

Analysts mentioned in this article did not provide trading guidance for AUD/USD. Bear in mind that your decision to buy, sell, or hold AUD/USD should be based on your risk tolerance, investing goals, and portfolio composition.

You should do your own research into the currency pair before trading, and never trade more money than you can afford to lose.

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