The speed and power the AUD/USD is moving certainly make us sit up and ask what will stop the momentum medium-term?
There is a clearly a fundamental clash happening between fair value inputs and market value inputs, with the latter far and away outstripping fair value.
Push factor on the AUD, the poster-child of a commodity currency, are increasing by the day as the Asian region particularly China use infrastructure to spend their way out of the economic crisis brought about by the pandemic.
With 7-year highs in iron ore and a surging copper price there is a rocket under the AUD/USD currently. The surging price in commodities something that is unlikely to subside in the coming quarter or even the first two quarters. It’s clear with that over the coming 3 years there will be a global effort with almost unlimited spending to smooth out the economic scares of COVID.
The pull factor is the RBA’s $100 billion quantitative easing (QE) program. We should point out that we are now over halfway through the current program and its effect on the AUD has been minimal at best.
The program is due to expire in the next 3 months and any pressure it was putting on the currency will be released. With no pull factors at play the AUD will be further released to float higher still.
There is a caveat to the QE program, if post the completion of the current QE program the Board believes further intervention is required to constraint the AUD’s movement they will.
Several states from the Board have stated they are willing to take on more QE intervention to target the AUD’s meteoric rise. But it’s clear the push factors are drowning out any policy intervention.
There are also push factor on AUD coming from the international pull factor of QE. The US, Europe, the UK and Japan are all lining up to enact programs of their own. The size and scale from each central bank and federal government will overwhelm anything the RBA puts out meaning the AUD has an additional tailwind.
According to Refinitiv’s latest survey of economist the AUSD/USD is forecasted to reach $0.83 by year end with a $0.78 mid-year target. That mid-year target is has been tested twice last week at $0.7767 don’t be surprise to see it testing $0.78 in the near future as momentum is strong and technically the pair is still in an upwards channel. If the pair was to scale pasted $0.78 the next target is the $0.80 handle.