How will the Aussie Dollar perform through the rest of 2021?

By George Hopkinson, Senior Corporate FX Consultant

Throughout 2021, inflation has been the new theme in global markets. As we move into the second half of the year, many want to know—will this continue into 2022? And how will central banks respond?

AUD at a glance

What’s impacting the Australian Dollar right now?

• Faster than expected post-COVID recovery in Australia

• Protracted trade tensions with China

• Unemployment back to pre-pandemic levels

• No inflation in Australia – RBA to potentially raise rates in 2024

• The Federal Reserve seeing inflation in the USA – transitionary or not?

• US Treasury bond yield rally

• Global vaccine rollout is critical to economic growth

• Global material prices rising

The Australian dollar in review 

The first half of 2021 saw AUD strength across the board. In late February, the AUD/USD briefly broke the psychologically significant 0.8000 figure but could not hold those gains.

Sino-Australian tensions continued to escalate into 2021 with China imposing several trade tariffs on Australian goods including grains, wine and coal. However, these sanctions have not slowed the domestic post-pandemic economic recovery. Australian GDP has impressed along with record low unemployment rates. The housing market surprisingly gathered pace as the economy opened in 2020 and continued into 2021.

Despite strong signs of growth, Australia’s inflation has been lower than that of the UK, Europe and the USA. The RBA has continued its accommodative monetary policy stance by maintaining their bond buying program whilst keeping the cash rate at 0.1%. There are no signs of this changing anytime soon. The RBA are expected to raise rates in 2024, far behind the US FOMC who are predicted to raise rates in 2023.

The AUD started to fall towards the bottom of its recent range in June, showing the effects of Australia falling behind the global vaccination race. At time of writing, Australia is dead last in the OECD vaccine ranking. In the rest of the developed world, the vaccine rollout is gaining pace and the global economy is showing signs of recovering. The US has fully vaccinated >60% of its adult population and the UK is similar. Australia are currently lagging at 8% and show no signs of opening international borders until deep into 2022. With the UK and US economies opening, the latest lockdown measures in Sydney have weighed heavily on the AUD after ‘Fortress Australia’ spent most of the last 18 months being the envy of the globe with comparatively few COVID infections.

What’s going to happen in H2 2021? 

To answer that question, we’ll need to consider two key questions. 

1. Will the RBA bring forward their monetary policy normalisation?
   For this to happen the Australian economy will need to show signs of wage growth and inflation. Even if the data surprises and points towards the central bank taking action, the RBA are unlikely to start normalising before H2 2023.

2. Will the vaccine rollout gain pace and fuel the economy further? 
   A faster rollout of the vaccination program will help the Aussie and the economy. The current slow rollout is hurting the AUD against all major currencies. Once ‘herd immunity’ is reached, a date for reopening international borders will be the true acid test. Will ‘Fortress Australia’ transition smoothly into the global economy or will it slip into being a hermit nation, locked away from the rest of the world?

In conclusion? 

The Australian economy has mostly been the global darling of the pandemic, with very few cases and very few lockdowns. Into the second half of the year, the slow vaccine rollout could create further lockdowns which will weigh heavily on the economy.

Inflation overseas means the Aussie will not be favourable to investors as a traditional ‘carry-trade’ currency as interest rate normalisation is a long way off. If Australia can get on top of the immunisation rollout then the AUD could shrug off the pandemic and the Chinese trade tensions and ride high into the second half of the year.

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