FX BEAT: Aussie dollar well set for gains in 2023

The Aussie dollar can continue its strong run so far in 2023, says Westpac senior currency market strategist Sean Callow, lifted by the prospect of more RBA interest rate hikes and an improving growth outlook in top trade partner China.

That’s good news for Aussie travellers, who can expect more bang for their buck overseas, particularly in destinations such as Turkey, Japan and India.

Beijing’s retreat from its Covid-zero policy is being viewed by the market as broadly positive for Asia’s largest economy, and an improving outlook for China’s infrastructure and housing sectors has helped to boost the price of key Australian commodity exports such as iron ore and copper. 

“It’s improved the prospects for Australian commodity prices and investor perceptions of the Aussie, so if that remains the case it may be that our year-end forecast of 74 cents (against the U.S. dollar) may be a bit conservative,” Callow says in a podcast interview. Gains in January have already seen the Aussie rise above 70 cents to the U.S. dollar for the first time since August. 

At the same time, inflation at home is running at its strongest annual pace since 1990, according to the latest official data, giving the RBA little scope to pause its series of rate increases. Higher rates are generally bullish for a currency because they increase the yields investors receive for holding assets in that currency.  

“The fact that inflation was even higher than expected in the December quarter does seem to cement the case for further rate hikes, rather than a pause in the near term,” Callow says. Westpac economists expect the cash rate to peak at 3.85 per cent, implying three further 25 basis point rate hikes in the first half of the year.

The stronger pace of policy tightening from the Federal Reserve put the U.S. currency on top for much of 2022, but markets are already starting to factor in potential rate cuts from the Fed by the second half of 2023.

“Even though U.S. rates are clearly higher than Australian rates, and that’s likely to remain the case, the Aussie is still benefiting from that change in perception on where yields are going,” Callow says.

A stronger currency should boost Australians’ spending power abroad, and Callow highlights a few destinations where the impact will be felt most keenly.

“Turkey is one, where people may be looking at ANZAC Day visits. The Turkish lira has been very weak, they’ve had very high inflation - that’s undermined their currency and that’s probably going to remain the case.”

Japan is another location where Australians may be pleasantly surprised by the prices, and anyone thinking of a trip to India to support the Australian cricket team on tour there in February will also be rewarded.

“The Indian rupee has been quite weak in recent years. They are vulnerable to high oil prices – India imports a huge amount of oil and that leaves its currency exposed. They’ve had a bit of inflation trouble there also.”

One destination that has not been cheap for Australians in recent times is New Zealand, where the Kiwi dollar has blasted higher on the back of aggressive interest rate hikes from the RBNZ. But Callow thinks its strongest point has now passed.

“The RBNZ expects the New Zealand economy to go into recession – they think that’s what is needed to get inflation back on target. So while interest rates are on track, Westpac thinks, to a 5.25 per cent peak, well above Australia, that is baked into expectations, and I think now there is more of a focus on slower growth in New Zealand relative to Australia.”

For more insight and analysis from Sean and the team, visit WestpacIQ.

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