NAB: Spending Some Time Below Its $0.70-0.80 Comfort Zone

NAB note that they “are reluctant to call a peak in the USD, given a still hawkish Fed, rising risks of a global recession (Eurozone, China led) and which we are not convinced is adequately priced into risk asset markets - an ongoing threat to AUD given its risk sensitive/pro-cyclical nature.”

• “Our stronger for (still) longer USD view implies that AUD/USD will struggle to hold on to periodic forays above $0.70, with more time to be spent inside a $0.65-0.70 range through 2022.”
• “Also in the mix now is USD/CNY - a rise to as high as CNY7.00 would, on a literal read across - barely be consistent with AUD/USD above $0.65.”
• “From a valuation perspective, longer-dated hedging from Australian exporters and reassessment of FX hedges by asset managers should become a consideration should levels at or below $0.65 be seen (so a potentially AUD supporting influence).”
• “We now only see AUD back above the $.070 mark, on a sustained basis, from around mid-2023, on the assumption the USD begins a cyclical decline following signs of Fed success in its anti-inflation pursuit and the ability of markets to price Fed easing - ahead of other central banks - with greater confidence.”
• “A reversal in extreme USD (over)valuations can then come into play.”