The Australian dollar is expected to weaken further in the near term, but a broader recovery is likely in 2023, according to a new study.
On November 9, Italian bank Intesa Sanpaolo expects the Australian dollar to weaken further against the dollar, euro (1.0164, 0.0153, 1.53%) and pound (1.1657, 0.0301, 2.65%), but a global economic recovery in 2023 should allow Australian dollar recovers. At least until the end of the year, the Aussie will be caught in a dilemma between rising interest rates and the evolution of the global cycle.
Asmara Jamaleh, an economist at the bank, said: “The Australian dollar has performed well in general at the beginning of the year, rising from 0.69 to 0.76 against the US dollar between January and April, before falling and hitting a low in October.”
Intesa Sanpaolo said there are two main reasons why the Australian dollar is expected to continue to weaken in the near term:
1. The impact of the deteriorating economic situation on the Australian dollar has been magnified
2. The RBA, while making containment of “excessive” inflation its top priority, has also acknowledged its desire to maintain domestic economic growth and opted to raise interest rates slightly ahead of other major central banks.
The Reserve Bank of Australia cut interest rates to 25 basis points in October and November, becoming one of the first central banks to signal that it is entering the later stages of its rate-raising cycle. That, in turn, has capped yields on Australian bonds, while central banks in those countries are moving more aggressively to raise rates.
Therefore, if the RBA continues to remain silent on rate hikes relative to other central banks, it could weigh on the Aussie.
It is worth noting that the market expects the Federal Reserve and the Bank of England to “announce” interest rate hikes in the next few months, which will cause the Australian dollar to fall against the US dollar and the British pound to rise against the Australian dollar.
“So in the short term, the Aussie will still face fresh weakness, but it should recover gradually over the next year, although upside still appears to be limited,” Jamal said.
The global economy and commodity prices are key determinants of the Australian dollar’s recent underperformance and should weigh on the medium-term outlook, Intesa Sanpaolo said. Therefore, expectations of a recovery in global growth in 2023 should help the Aussie strengthen.
“The Aussie should recover gradually over the next year, reflecting an expected break in the dollar’s uptrend, a more favorable commodity overall, and a gradual decline in domestic inflation expectations in Australia,” Jamal said.
