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Aussie’s Rally Forecast to Strengthen With Commodities Booming

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(Bloomberg) — The Australian dollar is turning a corner as a global recovery from the pandemic brings windfall for the commodities exporting nation.

On a three-week winning streak, the Aussie has climbed 3% since late-January and analysts expect another 4% upside to around 75 U.S. cents by the fourth quarter, according to a Bloomberg survey. That’s after the risk-sensitive currency fell to an 18-month low amid concern over the impact of aggressive Federal Reserve rate hikes on the global economy, the omicron outbreak and the resurgence in Russia-Ukraine tensions.

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Strategists are backing a boom in commodities and expectations the Reserve Bank of Australia will lift policy rates in June to fuel an Aussie rally.

“It’s hard to find a really bad story in Australia, we’ll look back here and see these were good shopping levels,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong. And while the Aussie tends to be sold when risk-sentiment takes a hit from jitters such as omicron, “that’s all well priced now” in markets.

For technical traders, the Aussie may have formed a so-called double bottom pattern and is attempting to break out of its 2021 downtrend. It has gotten a boost by a surge in iron ore to a six-month high last week — Australia’s largest export — while additional policy easing in China is seen further boosting demand for the country’s raw materials.

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“If China were to ramp up the stimulus this year, that would enhance the tailwind for the Australian dollar,” said Alvin T. Tan, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. He sees the currency ending the year around 73 U.S. cents, up from the 72 cents it traded at on Friday.

Domestic Drivers

The Australian economy is looking up after it unexpectedly added jobs in January. Traders are now watching fourth-quarter wage growth data Wednesday for further clues on Reserve Bank of Australia policy.

RBA Governor Philip Lowe has so far kept his options open on rate hikes. He reckons it will take time for low unemployment to translate into faster pay gains, suggesting tightening is still some way off. 

“If and when the RBA does eventually come to tighten, and the indications from the Reserve Bank are that later this year is possible, I think it might release the Aussie dollar for a bit of appreciation,” said Chris Siniakov, head of Australian fixed income at Franklin Templeton Investment Australia Ltd. 

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Bearish Bets

However, some investors still remain bearish on the currency. 

“In a world where central banks, especially the Fed, are threatening to be more aggressive in the tightening cycle, that’s not an Aussie-dollar positive story,” said Sally Auld, chief investment officer at JBWere Ltd., the private wealth arm of National Australia Bank Ltd. “With a higher terminal rate priced in Australia than the U.S., I don’t feel the short rate-differential story is really going to work in favor of the currency.” 

She sees the Aussie declining to 68 U.S. cents this year. 

Here are the key Asian economic data due this week:

Monday, Feb. 21: China loan prime rate, Taiwan export orders, Thailand GDPTuesday, Feb 22: Malaysia foreign reservesWednesday, Feb 23: Australia wage price index, RBNZ official cash rate, Taiwan industrial production, Singapore CPIThursday, Feb. 24: Bank of Korea 7-day repo rate, NZ trade balance, Taiwan GDP, Malaysia CPIFriday, Feb. 25: NZ retail sales, Singapore industrial production, Thailand foreign reserves

©2022 Bloomberg L.P.

Bloomberg.com

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