AUD

Australian dollar turbulence is increasing, with the currency trading in a widening 450-pip band centered around the 0.67-cent mark in recent weeks. The exchange rate has been swung around by shifts in expectations around tightening cycles at the Federal Reserve and Reserve Bank of Australia, China’s faltering post-COVID lockdown recovery, and subsequent stimulus expectations, the downshift in global growth, Australia’s domestic economic resilience in the face of rising interest rates, and evolving risk sentiment. We think these gyrations could be taste of things to come in the third quarter. The Australian and global economies have entered a more challenging phase,...

For the Australian dollar, a more bullish scenario than our baseline outlook would stem from China’s economic revival exceeding expectations – particularly if it is led by a policy-induced upswing in commodity-intensive infrastructure spending. Stronger momentum in China would be a positive impulse for Australia’s terms of trade, the domestic and regional economies, and the currency. In our opinion, the Australian dollar could also outperform if the global economy remains resilient in the face of tighter monetary and credit conditions, and inflation decelerates substantially without aggressive policy actions inflicting much damage on labour markets or generating financial stability risks. However,...

Relative to our central case, a bearish scenario for the Australian dollar might stem from a deeper and more prolonged economic slump. A more significant slowdown is likely to flow through more negatively into commodity prices and risk assets, and weigh on growth-linked currencies. In a similar vein, a protracted period of high inflation could prompt central banks to continue to raise interest rates in the face of slowing activity and weakening labour markets, fanning the flames of financial stability concerns. This is particularly relevant for Australia, given the household sector’s high debt burden and the banking sector’s exposure to...