The Australian dollar is hovering around its lowest point this year and strategists are warning the currency is vulnerable to slipping into the high US60¢ to US70¢ range as markets price in the prospect of an imminent policy backflip by the Reserve Bank of Australia.
The currency fell 1.2 per cent to a fresh year-to-date low of US72.43¢ following the Reserve Bank admitting on Tuesday it would be “prepared to act” to soften further setbacks related to COVID-19’s grip on the economic recovery.
With the Australian dollar passing through July’s US72.90¢ low, there is now concern that the currency could suffer a loss of confidence.
“This move opens the Aussie dollar up to further downside … there is a growing risk [it] dips below US70¢ because of the negative Australia‑US 10‑year bond spread and slowing Chinese economic growth,” said currency strategist at Commonwealth Bank, Carol Kong.
“The combination of these two factors, plus the growing likelihood that the RBA will reverse its decision to taper asset purchases, creates enough headwinds for the Aussie dollar to push it below US70¢, particularly given it is one of the most volatile currencies,” added CBA’s Kim Mundy.
Strategists had previously predicted a strong second-half for the Australian dollar with many tipping it would climb higher than US80¢ as a matter of course. But COVID-19 outbreaks across the country, and chiefly in NSW, plus a strengthening US dollar have unwound those projections.
The near-term outlook for the Australian currency is now heavily reliant on dealing with the resurgence of COVID-19 cases in the region.
“We’ve tempered our enthusiasm because while there still remains conditions for a rally, we’d need to see a fuller economic reopening globally and shift in global growth away from the US,” said head of FX strategy at National Australia Bank, Ray Attrill.
“In that environment, we’d expect the US dollar to resume its weakening trend at some point, which is a pre-condition for the Australian currency recovering the ground it’s lost in the last couple of months.”
A similarly substantial fall was seen in the New Zealand currency, which dropped 1.5 per cent to US69.15¢ late on Tuesday, following news the country will be placed into lockdown in response to its first community case of COVID-19 since February.
On Wednesday, the New Zealand dollar dipped further to US68.90¢ immediately after the Reserve Bank of New Zealand’s surprising decision to leave the cash rate on hold at 0.25 per cent, before swiftly recovering to US69.35¢.
Pundits had widely tipped the RBNZ to become the first major central bank to hike rates following last month’s decision to end its quantitative easing program.
The inaction was “in the context of the government’s imposition of Level 4 COVID restrictions on activity across New Zealand,” the central bank said.