In 2023, Analysts Expect Australian Dollar to Outperform Pound and U.S. Dollar

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According to analysts, the Australian Dollar (AUD) is expected to outshine the Pound and U.S. Dollar in 2023. This bullish forecast comes amid a strong economy that stands to receive additional support from China.

“We view the AUD as less likely to be swayed by speculative flows given that Australia no longer had a current account deficit and given that the narrowing of interest rates spreads between Australian and US interest rates,” says Foley.

On January 11, the Australian Dollar was officially announced as the 2023 outperformer against Pound and U.S. Dollar when it was reported that headline CPI inflation had increased by a remarkable 7.3% year-on-year in the final quarter of 2022.

This significant surge in inflation is indicative of a strong economy that stands to receive additional support from China, as well as being less likely to be swayed by speculative flows due to its current account surplus.

The narrowing of interest rates bolsters the Australian Dollar’s positive outlook for 2023 spreads between Australian and US interest rates, primarily driven by domestic demand support measures implemented by both countries.

Data released on January 11th also showed that retail sales in Australia had risen an impressive 1.4% month-on-month in November, far ahead of expectations for 0.6% growth and with previous estimates being revised significantly higher.

“These data have strengthened expectations of another 25 bps rate hike from the RBA next month and pushed back of talk that the central bank could be on the cusp of a policy pause,” says Jane Foley, Senior FX Strategist at Rabobank.

Analysts have noted that the AUD has outperformed other currencies during periods of turbulence and a low AUD inflationary environment, suggesting it could continue to outshine other currencies even if global economic conditions become less favourable.

Further strengthening its long-term outlook is Australia’s comparatively low public debt levels compared with many developed economies. At the same time, its external balance sheet remains solid – with current account balances remaining positive since February 2020. This means the AUD should remain resilient to global economic downturns.

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