Guest blog: The Australian Dollar in 2021 – In the hands of others

Category: Guest blogs

AUD has been the poster child for the recovery in risk assets since the early, darker days of the pandemic and its continued position at the front of the pack is probable but in no way guaranteed by the path of the global economy in the coming 12 months. Unfortunately, even more so than usual, the fate of the Australian economy and the dollar is almost exclusively in the hands of other people.

Chinese double-edged sword

Exports to China are worth 260% of Australia’s next most valuable trading partner – Japan – and the continued demand for commodity exports from China kept both commodity prices and the AUD well supported through the pandemic. The main exports of both iron ore and coal are set to prices falls as supply issues that have dominated markets during the pandemic fade.

Relations however between China and Australia have soured somewhat through 2020. Initially this started following Australia joining others in the international community in asking for an independent enquiry into the evolution and spread of the Covid-19 virus but the mood has improved and recent moves have seen China impose tariffs and bans on some Australian exports.

At the moment this covers coal, copper, wine, sugar, timber, cotton, beef and lobster to varying extents but an oversized impact will come should China start to target iron ore or LNG. At the moment, we do not see this happening for two reasons:

  • International relations tend to improve as economies get richer as both China and Australia will do in bouncing back from the
  • Trade is set to become a lot more predictable with China as a whole given the election of Joe Biden and the gradual softening of Trump trade

Sunshine is the best disinfectant

Australia’s handling of the Covid-19 crisis is broadly comparable to New Zealand’s although the strength of the contagion in the state of Victoria meant longer lockdowns than was originally envisaged. With the news that multiple vaccines may be available in the coming months and Australia entering the summer, limiting the transmission of a respiratory disease, Australia is in a prime position to get back up and running a lot quicker than those of us in the Northern Hemisphere.

Central bank on standby

The Reserve Bank of Australia has been one of the most aggressive central banks in combating the economic effects of the pandemic but it will be tricky to maintain that level of aggression moving forward.

Unlike their antipodean cousins, the RBA have stepped away from talking about negative interest rates and we think that threats of their use will lack credibility going forward, a strong AUD will likely breeze through them.

In summary, if market minds are focused on a recovery then we will be looking for a higher AUD and it is not out of the realms of possibility that AUD outperforms the majority of the G10.