Australian Dollar Forecasts Show Split Over V-Shape Recovery

(Bloomberg) -- For an idea of how disparate predictions are for the world’s post-coronavirus rebound, look no further than forecasts for Australia’s dollar.

Bulls such as Morgan Stanley see the currency rising to 73 U.S. cents by year-end as the worst of the pandemic eases. At the other end of the spectrum, JPMorgan Chase & Co. and Rabobank say it may tumble to the low 60s level due to slowing global growth amid a second wave of infections and U.S.-China tensions.

The Aussie’s fortunes have waned since it rebounded from a 17-year low as a new surge in virus cases threatens to upend the global rebound narrative. Further gains for the currency are contingent on firmer commodity prices and a recovery in Chinese demand, reflecting the tenuous outlook for the world economy.

The biggest factor driving the risk-sensitive Aussie will be “the performance of the global economy,” said Ben Jarman, senior economist at JPMorgan, who sees the currency dropping to 64 cents by year-end. “And particularly, its ability to vindicate the rapid recovery in risk assets.”

Among the optimists, Morgan Stanley’s David Adams is confident the Aussie will enjoy “front-loaded gains” as Australia’s growth outpaces that of developed market peers. The nation’s expansionary fiscal policy also helps, as well as the Reserve Bank of Australia’s policy which is less dovish than global peers, according to a June 19 report.

The currency of the iron ore and natural gas exporter was trading near 69 cents on Thursday.

Central bank Governor Philip Lowe has done little to damp the enthusiasm, noting last week that it’s “really hard to argue” the Aussie was overvalued.

“We see further upside through to the end of the year, with the Aussie comfortably rising above 0.72 in the most likely scenario of a ‘swoosh-shaped’ global growth recovery,” said Ranko Berich, head of market analysis at Monex Europe Ltd. in London. Still, the currency’s rise won’t be smooth, especially if any of the major economies re-impose a lockdown, he said.

Trade Risk

Some point out that Australia’s economic fortunes depend on China, and given Beijing’s dispute with Washington over the virus outbreak, uncertainties abound. Case in point: the Aussie slid almost 1% when there was a brief bout of confusion over the fate of the U.S.-China trade deal last Tuesday.

Such swings may recur and Canberra’s request for an inquiry into the coronavirus’ origin adds to the risks, according to Rabobank strategist Jane Foley, who expects the Aussie to end the year at 62 cents.

And then there’s the renewed spike in Australian infections. The state of Victoria has imposed a four-week lockdown across parts of Melbourne to try to contain the spread of the virus.

READ: As Covid Cases Rebound, Aussie Dollar Option May Give Risk Hedge

For their part, asset managers have dialed back their bearish conviction. Short positions, which have been in place since October 2017, fell to the least in more than two years in the week ended June 23, according to data from the Commodity Futures Trading Commission.

“Going forward you’ll have periods of risk on and risk off that will impact the Aussie,” said Adam Kibble, investment specialist at Insight Investment, predicting the Aussie will end the year at 70 cents. “And in those periods of risk off, there’ll be an opportunity to increase your hedging levels and reduce your foreign-currency exposure.”

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