Westpac Adjust AUD/USD Forecasts Higher

{AU} AUD: Westpac Adjust AUD/USD Forecasts Higher

Westpac note that “the horrific developments in Ukraine have turbo-charged commodity prices, a key driver of the AUD.”

• “We have made significant changes to our commodity price forecasts. Our working assumption is that almost all the surge in the oil price is behind us. Russia’s crude exports have been largely eliminated from global supply as official sanctions, voluntary sanctions and shipping disruptions have already severely curtailed supply.”
• “From this point we expect there will be some slow responses on the supply side, from other producers, while some demand will be dented by high prices. We are assuming an oil price of US$100/bbl through to end 2022. Other key commodity prices for Australia - coal and base metals - are also expected to hold at extremely high levels through to year’s end.”
• “Given our new commodity price forecasts, fair value AUD models that do not include a subjective proxy for risk are screaming that it is heavily undervalued. But our expectation of ongoing elevated commodity prices is also coinciding with a period in which high risk aversion is dominating markets.”
• “The Australian dollar is a ‘risk on’ currency so we have been quite cautious with near term upward revisions to our currency forecasts. Our June AUD/USD target has been lifted from $0.70 to $0.73, bearing in mind that by this time we also expect the FOMC to have raised the federal funds rate by 75bp, in three quick tranches.”
• They now have an AUD/USD “target of $0.76 by end 2022 and $0.80 by end 2023,” but caution that “risk aversion and relative interest rates are likely to constrain the AUD over the next few months despite significantly higher commodity prices.”