AUD recovery seen weighing on USD & GBP in 2022Rabobank eyes 0.74 for AUD/USD, 1.74 for GBP/AUDCBA tips steeper AUD/USD rally, lesser GBP/AUD dip

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Forecasts from Rabobank and Commonwealth Bank of Australia suggest the Australian Dollar could turn the tables on Sterling later in 2022.

Australia’s Dollar rose against its New Zealand and Swedish counterparts during the early weeks of January but ceded ground to other comparable currencies including the Pound, which has remained buoyant above the 1.88 handle in recent trading.

January’s softness continues a trend that was evident throughout most of last year but stands in contrast to some analysts’ expectations for the antipodean currency later in 2022 when it’s seen as likely to push the Pound-Australian Dollar rate back to 1.80 and below.

“In our expectations the USD is likely to remain on the front foot through the first half of this year as Fed tightening begins. The USD’s dominance in the global payments system suggests it is set to find additional support if the tensions regarding Ukraine worsen further. AUD/USD could struggle to make much headway in this environment,” says Jane Foley, a senior FX strategist at Rabobank.

“That said, the improvement in Australia fundamentals suggests AUD/USD has potential to finish the year moderately higher in the 0.74 area. We also see scope for AUD to outperform the GBP on a 6 month view. This is based on our estimate that the market has priced in too much policy tightening from the BoE. Our 6 month GBP/AUD forecast stands at 1.74,” Foley wrote in a review of Rabobank’s forecasts this week.

Above: Pound to Australian Dollar rate shown at daily intervals alongside AUD/USD.

GBP/AUD reference rates at publication:

Spot: 1.8864High street bank rates (indicative band): 1.8204-1.8336Payment specialist rates (indicative band): 1.8694-1.8770Find out about specialist rates, hereSet up an exchange rate alert, hereKeeping the Aussie on its back foot has been a gulf between monetary policy stances of the Reserve Bank of Australia (RBA), Federal Reserve (Fed) and Bank of England (BoE), which has grown wider in recent months due to the latest developments in U.S. and UK interest rate policy.

The Fed has moved rapidly in more recent months to prepare the market for an accelerated withdrawal of the monetary support provided to the U.S. and global economies since the onset of the pandemic, maneuvering itself into a position where its interest rate could be raised as soon as March.

In the interim the BoE went ahead and lifted its benchmark interest rate back to 0.25% back in December and warned that a further tightening of policy is likely for the months ahead, which has led the market to wager that Bank Rate could rise to 1.25% before the curtain closes on 2022.

“The elevated level of commodity indices should provide a good level of support for the AUD despite the current shaky tone of risk appetite. The stronger than expected Australian Q2 CPI reading and the resultant rise in speculation that the RBA will have to back away from its guidance that a rate rise this year is ‘unlikely’ provides another reason for the AUD to stay supported,” Rabobank’s Foley said this week.

The RBA has, on the other hand, stood behind its earlier assessment that a legacy of too little growth in workers’ wage packets would be likely to ensure that recently-increased inflation pressures eventually dissipate of their own accord.

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This has led the bank to insist repeatedly that its cash rate would be unlikely to rise from its current 0.10% level much before the year 2024.

“We believe the RBA will need to make a fundamental adjustment to their “low and gradual” inflation narrative in their upcoming communication next week. We shift our central scenario for the first hike in the cash rate from November 2022 to August 2022 (the risk lies with an earlier hike in June),” says Gareth Aird, head of Australian economics at Commonwealth Bank of Australia.

The RBA’s view on inflation and connected policy stance has led speculative traders to bet heavily against the Australian Dollar over the last year, likely explaining a large part of its underperformance, although this week’s inflation figures for the final quarter of 2021 and recent data coming out of the jobs market could potentially be a game-changer for Aussie interest rate policy as well as for the currency.

Australia’s official measure of inflation rose to 3.5% on an annualised basis last quarter and various refined measures of price growth also exceeded the 2.5% target of the RBA, while employment figures had already shown the rate of joblessness falling to its lowest level since before the 2008 financial crisis, stoking expectations among economists of a potential pickup in wage growth that could catalyse action from the RBA.

An about-turn by the RBA on its interest rate stance could be likely to prompt a rethink among speculative traders betting against the Aussie, potentially leading to a recovery in AUD/USD and acting as a headwind for GBP/AUD.

Above: U.S. Dollar performance during the past seven Federal Reserve tightening cycles. Source: Commonwealth Bank of Australia.

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The research team at Commonwealth Bank of Australia also sees at least one more reason for why the antipodean currency could be likely to rise and put pressure on the U.S. Dollar and Pound-Aussie rate in the process.

“The lead up to and start of FOMC policy changes is typically a major event for financial markets, including the direction of AUD/USD. A close look at the historical record shows AUD/USD increased initially in six of the previous seven FOMC tightening cycles. AUD/USD often peaks around one year after the FOMC starts the tightening cycle,” says Joseph Capurso, head of international economics at CBA.

“With one exception, Australian commodity prices steadily increased throughout previous FOMC tightening cycles. A strong US economy is often associated with increasing commodity prices. Similarly, the USD tends to fall against most major currencies, not just AUD, at least in the early stages of FOMC tightening. The USD is a ‘counter‑cyclical’ currency that falls when the world economy is strong,” Capurso wrote in summary of recent research.

The Federal Reserve has rapidly pivoted into a position where its interest rate could be raised on as many as three occasions this year while anticipation of the initial move has been one factor keeping the U.S. Dollar buoyant and AUD/USD under pressure during recent months, with supportive knock-on effects on the Pound to Australian Dollar rate.

However, CBA research suggests that an initial increase in the Fed’s interest rate has historically marked a high point or peak for U.S. Dollar exchange rates and that it’s has typically been an uplifting influence for AUD/USD.

This is a part of why analysts and economists at CBA look for AUD/USD to recover back to 0.74 this quarter and 0.80 by year-end, in price action which they expect will push the Pound-to-Australian Dollar rate back to 1.8243 this quarter in advance of a decline to 1.75 by year-end.

Above: GBP/AUD shown at weekly intervals alongside AUD/USD.