Australian Dollar Set to Rally

The last few years have been a bumpy ride for AUD/USD, falling more than 30% since early 2018. It has been pushed lower and lower by a number of different forces.

2018 and 2019 were tough years for the currency, primarily due to the domestic deleveraging cycle, which weighed on growth. These effects were then amplified by Fed hawkishness and the elevated trade tensions between the US and China.

AUD/USD 5yr chart 20200401

2020 weakness in the risk-sensitive Aussie has been so far driven by COVID-19 concerns, exacerbated by the weakness of China’s demand for Australian commodities. As is well known, investors will always flock to the safety of US Treasuries in a crisis – and this one has been no different.

The Aussie has underperformed all of its G-10 peers in the past 3 months but analysts around the globe are just starting to turn bullish on the currency, believing we have seen the bottom.

AUD/USD Currency
Currency Analysts becoming bullish on AUD/USD, after recent underperformance

Asset Allocation Specialist at Cresstone, Rob Holder, believes the currency could climb as much as 13% to 70 US cents by year-end. Citing the pandemic as the black swan weighing the currency down, Holder declared that we should expect a sharp rise in the AUD/USD once negative news flows begin to slow.

Given that it is Australia’s largest trading partner, the velocity of the rebound will also be dependent on China’s revival. The coronavirus started in China so their recovery story is already far more advanced than other countries around the world. According to Chinese officials, more than 90% of their citizens are now back to work, indicating the economy is well on the way to normalcy.

Once the Government announces further stimulus to jumpstart production and make up for lost time, expect Australia (and the AUD) to benefit.



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