– The AUD tends to move over several years
– The AUD depreciation period may have expired
– GBP / AUD could be lowered as a result
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- GBP / AUD spot rate at time of writing: 1.8310
- Bank transfer rates (indicative): 1.7670-1.7780
- Prices for FX specialty providers (guide value): 1.7880-1.8150
- You can find more information on market strikes here
The Australian dollar could be at the beginning of a multi-year rally that could last through 2021, according to economists at the Australian lender Westpac.
Studies show that the Australian dollar tends to embark on long-term cycles that last for a few years, and a tipping point may have occurred in 2020 where the currency exits a trend of declining and begins a trend of appreciation.
"The current period of AUD appreciation is likely measured in years rather than months. If we look back on the cycles of the AUD since the mid-1990s, there was an upswing (late 2001 to July 2008 (GFC)) that lasted seven Years. Of course, that period coincided with the first outbreak of industrialization in China. There was another five-year period that marked the decline in the AUD before China, "said Bill Evans, chief economist at Westpac.
It should be noted that since the 2008 financial crisis, the Aussie dollar has started a three-year appreciation period against the US dollar, followed by a four-year decline, followed by a two-year rebound.
"The only sustained 'short' cycle was the nine month collapse of the AUD immediately after the GFC. The point is that once a clear trend is noted, the AUD has a solid history of sustaining the trend for several years." says Evans.
The Australian dollar was in a period of decline from early 2018 through the first few months of 2020. At this point, the coronavirus outbreak appears to have pressed a reset button for the global economy and financial system that could be the catalyst for another multi-year Australian dollar rebound.
"With the AUD now four months into likely established swing history, this clearly encourages us to expect the upswing to continue at least until 2021, if not significantly further," said Evans.
Westpac forecast that the AUD will rise steadily against the US dollar from $ 0.72 to $ 0.76 through 2021.
The bank's modeling estimates the fair value for the AUD / USD exchange rate currently at 0.77, which indicates an undervaluation of around 5 cents compared to the current exchange rate level of around 0.72.
"We're seeing this fair value gap close significantly in 2021," says Evans.
The impact on the outlook for the pound to Australian dollar exchange rate is less clear, but as we can see from the multi-year GBP / AUD chart below, this pair also tends to tackle sizable multi-year trends:
It is noticeable that the GBP / AUD has been in a multi-year upswing since October 2016 when the pair fell into the 1.60s. However, since then the pair has soared to a high of 2.0 in March.
Notably, the appreciation trend came at a time of well-documented Brexit concerns as the pound sterling was down against other majors, suggesting that ultimately, the Australian dollar's move will be crucial for GBP / AUD.
If Westpac's observations and expectations on the AUD / USD have a strong impact on the GBP / AUD, it can be assumed that the pound sterling is facing a prolonged period of weakness, unless some idiosyncratic drivers emerge to break that Increase GBP.
While we cannot give the outlook for GBP / AUD or AUD / USD with absolute certainty, we would suggest that this research should ask a few important questions to readers interested in the Aussie dollar. If you want to set current or future rates, we encourage you to speak to forex specialists at our partner Global Reach for assistance.
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