Australian dollar set to decline further as recession talk grows

Bloomberg

Risks are skewed towards the Australian dollar declining even further in 2022 after touching a two-year low this month amid concerns over slowing economic growth.
Commonwealth Bank of Australia sees the currency declining to 65 cents versus the greenback by December, from about 68.6 cents last week. Leveraged funds, which were betting on gains as recently as May, are positioned for further weakness.
While the Reserve Bank of Australia (RBA) last week delivered its first-ever consecutive half-percentage point interest-rate hike, and is expected to do more, the Aussie has still dropped about 6% in 2022. Economic clouds hang over both the US and Australia but the greenback is enjoying haven appeal and the Federal Reserve is raising rates faster than the RBA, with another 75-basis-point hike possible this month.
“As a pro-growth currency, the Australian dollar remains vulnerable to heightened recessionary concerns,” said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney. “This means that it is susceptible to spending a bit of time sub-68 near-term.”
The currency’s breach of support at 68.29 cents, its May low, has opened the door for it to decline further with little technical support until 64.64 cents, the 61.8% Fibonacci retracement of its March 2020 to February 2021 advance.
Unfortunately for the Aussie, growth worries appear unlikely to go away anytime soon. Nomura Holdings Inc. sees many major economies, including Australia, entering recessions over the next 12 months, and the slumps may be worse than forecast if rate hikes trigger housing busts.
Covid-19 outbreaks in China, Australia’s major trading partner, are only exacerbating the currency’s woes. A report that China is considering allowing local governments to sell 1.5 trillion yuan ($220 billion) of bonds in the second half of this year to boost infrastructure funding may offset this somewhat. Not everyone sees doom and gloom though for the
Australian currency this year.
Sean Callow, senior currency strategist at Westpac Banking Corp. in Sydney, expects the Aussie to rebound to 75 cents by year-end, even as he agrees that headwinds look strong in the near-term.
“Markets are underestimating the resilience of the Chinese economy, with a strong investment-led rebound likely over the second half of 2022,” Callow said. “This will help stabilise metals prices, while elevated energy prices underpin further Australian trade surpluses.”
He said recession talk isn’t applicable to Australia, with Westpac forecasting 4% growth over 2022. Investors searching for more clues will be monitoring several key pieces of Australian data this week, including the employment change and consumer confidence.