The outlook remains for further potential weakness in the Australian dollar, followed by only a gradual rebound over time, argue analysts at Wells Fargo. They point out that given stringent lockdowns that have been in place, activity could surprise to the downside, as could the Australian currency.
Key Quotes:
“Our base case is for an underwhelming performance by the Australian dollar over the medium term. That said, we suspect the risks are still likely tilted toward a larger initial decline and a smaller medium-term rebound.”
“Authorities are still facing challenges in getting the latest COVID outbreak under control, especially in New South Wales and Victoria. GDP could fall more than expected in Q3 and rise less than expected in Q4, both factors that could weigh on the Australian dollar.”
“The RBA has already delayed the next review of the pace of bond purchases until February 2022. Should growth and inflation trends remain muted, that date could get pushed back further, which would also restrain the Australian currency.
Australia's commodity prices (measured in U.S. dollar terms) fell 6% in August. An even sharper decline is possible in coming months—especially with growing concerns surrounding China's economy—and this commodity price weakness would likely be negative for Australia's currency.”
“In this less favorable scenario, the AUD/USD exchange rate could fall as low as $0.6500, and may struggle to get back to even $0.7000 over the medium term.”
