What most economists believe to be the reason behind such a prediction is the anticipation of increased stimulus spending by the Aussie government in 2021. In addition to this, vaccines are slowly hitting every major market in the world, reducing the angst of the COVID-19 bear market to a simmer. We have already seen the GBP revitalized after sentiments slowly improved.
There are dozens of theories that support this notion, with another dozen going against it. However, this is what creates the speculation that truly drives exchange rates on the market. But let’s take a look at the major powers at play for the AUD’s exchange rate in 2021.
We can’t talk about 2020 without mentioning the COVID-19 pandemic. No matter how we look at it, every single economy took a hit and is continuing to do so. However, some exceptions are starting to crawl their way back to what they had at the beginning of 2020 in particular.
Australia is most definitely one of them as a fresh injection of funds is well on its way.
However, this then raises further questions. Economists, as well as the Aussie government, are fully aware that this is like a bandaid on a gunshot. It will stop the bleeding for a few months or maybe the whole year, but the austerity period is inevitable.
During the austerity period, governments assume a full “cutting costs mode.” What this means is that spending is halted, taxes are increased, and all possible resources are consolidated. Austerity can bring the AUD down to where it started in January 2021.
Another great point for AUD’s appreciation theory is the waning strength of the USD due to huge political changes and changing economic policies. However, we can’t say that the AUD is becoming stronger here. It’s simply remaining in place while others falter.
In addition to surviving the storm, Australia will soon get its biggest trade partner back on track. The virus may have taken a toll on China’s economy, but it is now in restart mode, preparing for full functionality during the year. No matter how we look at it, AUD will receive a huge stimulus with refreshed trading.
For the past year, the AUD has been appreciating relative to the USD, putting it in a bullish trend which is very hard to break through, especially when all the supporting factors are still there.
We can also use the following key technical indicators, especially MACD (Moving Average/Divergence). For the majority of the year, AUD’s MACD was in the positive, dipping only a little bit when the first vaccines were announced, mostly due to expectations of USD’s revival.
But seeing additional political upheavals and now a natural disaster hitting the land of the free, most traders have gone right back to their bearish outlook for the world’s #1 currency. The MACD remains positive, but whether it remains as such remains to be seen.
Other factors include export increases of 16% and import cuts by 9% as of December. The main role, in this case, was played by Iron ore export, especially to China which helped to strengthen the country’s trade position.
The cold weather in several Asian countries this winter increased the demand for coal export (Australia’s second-largest export). Depending on the commodity demands is the key for the future of the AUD.
Australia’s economy was struck due to the global pandemic, and the currency was fluctuating for quite a while. However, as the vaccination began and global economies started to open up, demands on the Australian commodities increased, which worked in favor of the country’s economy. It is likely to continue being so in 2021 as the world prepares to recover, while Australia already started doing so in the summer of 2020.
Image courtesy of TRT World/YouTube Screenshot
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