Credit Agricole is making perfect sense to me on the Australian dollar:
Resilience in the face of higher UST yields
We are revising up our Antipodean currency forecasts. We now expect AUD/USD to finish 2021 at 0.80 and NZD/USDat0.76up from 0.78 and0.74, respectively.We expect peaks in the exchange rates in Q3 of 0.82and 0.78. The global economy is recovering from the pandemic faster than we expected and sentiment is holding up better than we expected in the face of higher UST yields.
Australian dollar risk index
The Antipodean currencies will experience a super-fast cycle rather than a super-long cycle, which means they are unlikely to reach the heights of the post-GFC era. Unlike the period following the GFC, China is not recovering much faster than the US. Chinese officials are also already talking about reducing leverage and curtailing stimulus. And, while FMC officials will continue to push back against any idea of tapering of its asset purchases in 2021, high vaccination rates and fiscal stimulus in the US mean tapering could occur in 2022.
AUD and RBA QE
There will be false starts to the end of this cycle, however, especially as US inflation picks up in the coming months. We would see such episodes as opportunities to buy the Antipodean currencies. The Australian and NZ economies are in good shape due to effective virus containment measures and fast acting central bank and government measures to shore up their economies.
We acknowledge there is a significant risk of President JoeBiden using the Budget Reconciliation processasecond timein 2021 to push through a large green infrastructure bill that will increase the US’s demand for commodities, especially base metals. An annual budget was not passed by the US Congress in 2020, so Biden technically has two opportunities to use the Budget Reconciliation processin 2021. A green infrastructure bill would involve significant investment in assetssuch electricity grids and electric vehicle recharging stations, which will increase the demand for base metals such copper and nicke
Australia lagging on COVID vaccination
The best way to take advantage of the friendly environment for the antipodean currencies is to buy the against funding currencies such as the EUR and JPY rather than the USD. The already fast recovering US economy makes the USD an unsuitable funding currency. Instead, the JPY’s underperformance will continue as the global economy recovers and gaps open back up between Japan’s chronically low growth and the rest of the G10.In the short term,the Eurozone’sslow vaccination rate will lead to a slower economic recovery and EUR underperformance.
This a great chance to accumulate offshore assets before the AUD begins to fall away again in 2022.
