The relative strength of the Australian dollar has been one of the key local-markets talking points in the fallout from COVID-19.
And CBA strategists expect that to continue in the months ahead, with a base-case target of US75c by year-end.
While it doesn’t have a direct bearing on stock prices, the direction of the Australian dollar is still important to small cap investors — particularly with respect to AUD-denominated gold prices.
And when asset classes everywhere sold off in the March panic, global currency markets weren’t immune.
A USD liquidity freeze saw the value of the Aussie dollar crash to around US55c, before an emergency response from the US Federal Reserve saw markets stabilise.
Since then though, the ‘battler’ has been on a steady march higher. And a shift in policy from the US Federal Reserve in late August saw the AUD rise above US74c for the first time in two years (it closed last night at 0.7280).
Australian dollar undervalued
For their part, the CBA currency strategists say AUD/USD “can appreciate further because it is undervalued relative to its fundamentals”.
Defining fair value in global currency markets, where average daily trading volumes are around $US5 trillion (compared to around $US80bn for stocks), is a complex exercise.
But in CBA’s view, the primary driver of an elevated AUD is the ongoing strength in bulk commodity prices such as iron ore.
“Chinese fiscal stimulus is supporting demand for Australia’s bulk commodities,” the analysts said.
And looking ahead, “the commodity price outlook suggests that Australia’s current account surplus will be maintained for some time”.
In addition, the broader re-pricing of the US dollar against all the major currencies will help support the Aussie.
RBA’s September meeting may be more relevant for AUD
On a broader level, CBA’s outlook is also shared by Australia’s Reserve Bank, with RBA governor Philip Lowe recently communicating the bank’s view that the AUD represents fundamental value at current levels.
Such a statement is likely to reflect the fact that the RBA has no near-term intention of intervening in markets to alter the value of AUD.
However, CBA added that today’s release of the minutes from the RBA’s September meeting “may be more relevant for AUD than is normally the case”.
That’s because at its September policy announcement, the RBA made a point of leaving its options open in terms of its ongoing policy response to the COVID-19 disruption.
It followed a subtle shift in language from Lowe in mid-August, when he told parliament that the RBA had “not ruled out a separate bond buying program, or other adjustments to the mid-March package”.
However, Westpac chief economist Bill Evans concluded on Friday that the central bank was in “no hurry” to adopt additional stimulus measures.
Notwithstanding another big wave of COVID-19 infections, CBA expects the Australian dollar to remain supported around US75-76c through to the end of 2021.
“However, US-China tensions and a win by President Trump in the 3 November election are intermittent downside risks to AUD,” the analysts said.