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HSBC: The Australian dollar is heading for 90 cents

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The Australian dollar has been grinding higher against the US dollar over the past two years.

After falling below 70 cents in early 2016, the AUD/USD quickly reclaimed that level just a few weeks later, embarking on the slow, grinding rally that’s been seen ever since.

It’s now back above the 80 cent level, underpinned by US dollar weakness, stronger global economic conditions and surging commodity prices.

After such a large move over the past 18 months, it’s got many wondering where the Aussie will head next.

According to HSBC’s FX strategy team, after busting through 70 cents in 2016 and 80 cents this year, the Aussie’s ascent will continue in the period ahead, forecasting that the AUD/USD will hit 90 cents by the middle of next year.

Yes, 90 cents.

Here are the bank’s latest AUD/USD forecasts:

Source: HSBC

There are punchy calls and then there’s HSBC’s call, undoubtedly one of the most bullish in the market.

According to the bank, the dominoes are lining up to fuel the Aussie’s next run higher.

The jigsaw pieces are starting to come together for [the RBA] to lift policy rates from record low levels. Inflation has pushed back to target and at least some of the recent boosts to the terms of trade is expected to feed through to the real economy. This should help to reassure the RBA that wage growth — the final piece of the jigsaw — is past its trough and bring normalisation into greater focus. We have argued earlier this year that the FX market was getting ahead of itself in anticipating rate hikes. But as we move into 2018 the discussion of tightening is only going to get louder. And delivery of this tightening is now much more likely. Our economists expect rate hikes in Q1 in Australia, and we now expect AUD-USD to rally towards 0.90 by the middle of 2018.

While some will argue that a stronger Australian dollar should act as a deterrent to lift rates, tightening financial conditions which risk slowing Australia’s trade exposed sectors, HSBC says that a gradual currency appreciation “is unlikely to derail the case for commencing the rate normalisation process”.

The AUD/USD has already rallied 17.6% from the nadir of .6825 struck in January 2016. A move back to 90 cents by the middle of next year would represent a further increase of 12.1%, extending its rally from early 2016 — should HSBC be correct — to a massive 32%.

The AUD/USD currently trades at .8026.

AUD/USD Daily Chart

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