The Australian dollar is still stuck between a tight band of support at 71 cents and resistance at 72 cents as we head into the end of the trading year, following a steady decline from the heights reached in October:
The continued dovish RBA compared to the Fed, BOE and ECB is clearly weighing on sentiment here with no change likely as the wonks at Martin Place take the rest of the summer off, coming back in early February, unless the continued COVID breakout dampens domestic demand.
Another major bank is forecasting big moves for the Australian dollar in 2022, but hedge their bets by stating any move higher will happen in the second half as the RBA remains extremely dovish, with an upside target of 76 cents vs USD.
This is because foreign exchange analysts at Bank of America anticipate an ongoing stalemate between negative and positive drivers that have kept the Aussie in check in the second half of 2021 to extend a while longer.
“The tug-of-war between the China slowdown and RBA policy normalization is likely to be the key theme for AUD in 2022,” says Adarsh Sinha, Head of Asia-Pacific FX Strategy at Bank of America in Hong Kong.
He says a slow pace of policy easing in China coupled with the RBA maintaining its dovish guidance will remain negatives near term.
“In addition, we expect a faster pace of Fed policy tightening and a stronger USD,” says Sinha.
This all hinges on the RBA hiking rates in the fourth quarter as it “reacts to strengthening economic conditions”, with BoA forecasting a 4% GDP rate in 2022 for Australia, with wage growth still expected to head towards 3% or so by the end of the year.
But headwinds remain:
Sinha says the Australian Dollar has proven resilient to slowing Chinese growth and a static RBA over recent months, which suggests to him headwinds “may be priced in to some degree”.
“There remains a meaningful risk premium in the exchange relative to its terms of trade,” says Sinha.
Bank of America economists expect more proactive policy easing in China in 2022 and this would bolster China’s import impulse as well as Australia’s commodity export prices.
“China policy easing should prove supportive but with some lag and later in 2022,” says Sinha.