In January 2023, the Australian Dollar (AUD) reached a four-month high versus the US Dollar (USD), as greenback weakness continued into the new year on forecasts of fewer interest rate hikes by the US Federal Reserve.

The AUD/USD was around 0.696 at the time of writing on 20 January, its highest level since late August 2022.

How will the AUD/USD pair trade in 2023? Let’s review the fundamentals of the Australian Dollar and look at the most recent Australian currency estimates for 2023 and beyond from analysts.

The Australian Dollar in Comparison to its Foreign Peers

In March 2020, the Australian Dollar fell to its lowest level against the US Dollar in almost 18 years, when the Covid-19 pandemic paralyzed the planet.

The Australian dollar fell more than 12% in the first quarter of 2020.

Following a near two-decade low of 0.55 against the US Dollar in March 2020, the Australian Dollar would undergo a spectacular return over the next 12 months.

The AUD/USD rate rose over 45% from its March 2020 low to a near three-year high of 0.8 by February 2021, aided by a rebound in commodities and energy demand.

Since then, the Australian Dollar has been steadily falling versus the US Dollar, pushed down by a variety of causes such as the Chinese real estate sector crisis, Australia-China tariff battles, and the Fed’s aggressive rate hike cycle.

In contrast, the US Dollar Index (DXY), which measures the performance of the USD against a basket of major currencies, has risen to its highest level in 20 years, as a result of the US Fed’s aggressive interest rate hikes.

In September 2022, the AUD lost 6.4% against the USD, its worst monthly performance in over nine years. By October 13, 2022, the AUD/USD had dropped to 0.6169, its lowest level since April 2020.

Inflation Data Starting to Affect Markets

After October US inflation data came in lower than predicted, and most global currencies rallied from their lows versus the US Dollar in November 2022. The market quickly priced-in a slower pace of future US Fed rate hikes.

In November 2022, the AUD achieved its highest monthly return in more than two and a half years, earning roughly 6.1% against the USD. The Australian Dollar finished the year on a high note, with back-to-back monthly gains against the US Dollar in the final two months of 2022.

Despite the late recovery, the AUD/USD concluded 2022, almost 6% lower at 0.681.

In 2022, the Australian Dollar outperformed the British pound and the Japanese yen against major currencies. The AUD/EUR rate stayed close to flat.

Also, the AUD/EUR fell 0.4%, the AUD/GBP gained 4.8%, and the AUD/JPY grew 6.8%.

The AUD continued to beat the USD in 2023, with AUD/USD rates on course for four weeks of gains as of January 9, 2023.

AUD Drivers: The RBA is Projected to Raise Interest Rates Further.

Although the RBA’s monetary policies were overshadowed by the ultra-aggressive US Fed and concerns about a worldwide recession in 2022, the duration of the current Australian rate hike cycle will be key for the AUD projection in 2023 and beyond.

After raising interest rates eight times between May 2022 and December 2022, raising benchmark lending rates to their highest level in over a decade, the RBA stated at its December 2022 meeting that it expected future rate hikes but was “not on a pre-determined track.

ING economists predicted that the RBA would raise interest rates by 25 basis points at its next meeting on February 7, 2023. According to ING, Australia’s interest rates will peak at 3.6% in 2023, up from the current rate of 3.1%. According to Rabobank’s Jane Foley, the latest Australian labor market reading, which showed employment unexpectedly fell in December 2022, may force policymakers to pause monetary tightening. She made the following comment on January 19, 2023:

In Australia, Inflation has Reached its Highest Level in More than Three Decades.

Analysts predicted that most central banks, including the RBA, will continue to focus on inflation in the short term.

Although pricing pressures in Australia have subsided, annual inflation remains uncomfortably high, rising to 7.3% in November 2022.

Inflation will remain a significant goal for the RBA. However, activity indicators will be an indication to the extent to which demand and so inflationary pressures are abating,” according to ANZ Research.

Concerns About the Economic Decline

The fear of a global recession was a major factor in AUD weakening in 2022. The theme will most certainly continue in 2023.

The Australian government presented its federal budget in October 2022, in which it reduced its long-term iron ore price expectations from $91 per tonne to $55 per tonne, highlighting the deterioration in demand for Australia’s major export. According to the budget:

Commodity prices are anticipated to return to long-term fundamental price levels, triggering a reduction in the terms of trade in 2023-24.

Elevated coal, iron ore, metals, and other commodity prices are expected to fall over two quarters, to levels commensurate with long-term fundamentals, by the end of the March quarter of 2023.”

Recessions in the US and Europe will weigh on the global economy in 2023 and, in turn, on Australia’s external accounts. However, a rebound in China will be beneficial. So far, the iron ore price has benefited, but Australia’s tourism and education exports will benefit greatly if China’s travel restrictions are relaxed, according to ANZ Research.”

Forecast for the Australian Dollar in 2023 and Beyond

In its AUD forecast, ANZ Research stated:

Overall, we anticipate that 2023 will be a stronger year than 2022. We expect the AUD to continue below USD 0.70 until June when broad-based USD weakening will assist push the AUD and other cyclical events towards year-end.

According to the research group, the AUD will be an “outperformer” among commodity currencies in 2023, with the “dollar dominance theme” fading as global inflation moderates.

ING’s Australian Dollar estimate for 2023 predicted that the AUD/USD exchange rate would be 0.71 by the fourth quarter of the year, as of 13 December.

Rabobank’s Jane Foley said on 19 January in her AUD/USD forecast that the currency might fall down to 0.67 in the next three months “on a combination of US recession concerns, a still hawkish Fed, and perceptions that the RBA is near to a peak policy.” The analyst went on to say:

However, on the belief that the Australian economy would avoid recession this year, we expect AUD/USD to find support and move higher again in the second half of the year. We anticipate a climb to 0.71 in the next 12 months.

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