The Rabobank FX Analysis team does not expect the Aussie to rally much higher over the next 12 months as the Reserve Bank of Australia’s expansive monetary policy will offset risk-related AUD demand when the economy starts to shrug off the pandemic-induced slowdown.

Key quotes

“The RBA will be keeping a close eye on the value of the exchange rate. That said, greater confidence amongst investors about the medium-term outlook for global growth has been injected into the market by recent vaccine news. While there are risks of near-term pullbacks in risk appetite as the world battles the pandemic, AUD/USD is likely to be pulled higher medium-term by the recovery trade.”

“The introduction of QE in Australia is a blatant tool to lower the attraction of Australian bonds to overseas investors and thus to reduce demand for the AUD. The premium on nominal Australian 10 yr bonds has reduced significantly relative to the post-financial crisis years (Figure 1). Currently, nominal 10 bond yields are close to those of the US t-note.”

“While we see scope for some backtracking from recent vaccine related optimism near-term, last week we revised higher our forecasts for AUD/USD and forecast 0.73 in 6 months and 0.74 in the latter part of next year.”