Analysis: RBA’s Nod to AUD Appreciation Could Spur More Gains
- Published on
- 07 Aug 2020, 02:43 PM
By Sophia Rodrigues
The Australian dollar’s recent appreciation has received a green light from the Reserve Bank which could pave the way for further gains as the exchange rate aims to narrow the gap with its rising fair value estimate.
In the August Statement on Monetary Policy published Friday, the RBA said that, “based on historical relationships, the level of the Australian dollar appears broadly consistent with the terms of trade and interest rate differentials.”
The RBA made the same observation not once but several times in the SOMP. It is the first time in a few years the RBA has justified the Australian dollar’s strength several times in the same document.
The RBA noted that the Australian dollar’s recent appreciation follows a sharp depreciation in March and is in line with the rise in the currencies of a range of other advanced economies against the backdrop of depreciation in the U.S. dollar.
At the current level, the exchange rate is “a bit above its level at the start of the year,” the RBA said. The Australian dollar is trading around $0.72 Friday compared with $0.70 at the start of 2020.
Not only did the RBA justify the AUD’s strength, it also signalled it may not attempt forex intervention when the exchange rate is broadly in line with fundamentals.
“At a time when the value of the Australian dollar is broadly in line with its fundamentals and the market was working well, there was not a case for intervention in the foreign exchange market. Intervention in such circumstances is likely to have limited effectiveness,” the RBA said.
MORE GAINS SEEN
Strategists at National Australia Bank hold the same view as the RBA, saying the rise in the AUD has been fully vindicated with its short-term valuation models where the fair value rose due to improvement in risk sentiment and key commodity prices. The rise is also in line with the longer-term AUD valuation model, they say.
NAB recently raised its forecast for the AUD, expecting the exchange rate to end this year at $0.74, next year at $0.78 and reach as high as A$0.80 by the end of 2022.
The forecasts are based mainly on an outlook for lower USD due to cyclical headwinds for the USD from underperforming economy and Federal Reserve easing, and positive outlook for AUD from China’s economic recovery.
Westpac’s fair value estimate for the AUD currently stands at $0.77, which according to chief economist Bill Evans allows ample scope for further appreciation without unnerving the RBA.
Evans has a more interesting view on the AUD, saying once the currency establishes a clear trend, it “has a solid history of sustaining the trend for a number of years.”
The AUD has now been on an upswing for four months and Evans thinks this is encouraging enough to expect the rise would be sustained through “at least 2021, if not considerably further.”
Westpac’s forecast for AUD is $0.72 by December but Evans said there is clearly an upside risk. By the end of 2021, Westpac expects the AUD to rise to $0.76.
ANZ’s fair value estimate for the AUD is $0.73, and it has a “mildly bullish” bias for month ahead. Interestingly, ANZ’s forecast for the AUD is $0.70 until the end of December 2021.
--Contact: Sophia@centralbankintel.com