Foreign exchange rate analysts at MUFG expect that overall risk conditions will hold firm over the next few months with the Fed remaining committed to support financial conditions.
It recommends buying the Australian Dollar to US Dollar (AUD/USD) exchange rate at 0.7620 with a target of 0.7895.
Global Dividends in Prospect, US Dollar Outlook More Balanced
After touching 0.8000 in late February, AUD/USD dipped to lows below 0.7550 before settling just above 0.7600 early this week.
As a backdrop, MUFG expects increased confidence in the global growth outlook, especially if the EU can secure sustained boost in vaccination rates. Increased confidence in the global outlook would underpin the Australian currency.
The bank does not expect a resumption of US dollar weakness at this stage, but does expect a 1.16-1.20 range for the Euro to Dollar (EUR/USD) exchange rate as overall dollar momentum fades.
“We see a less US-centric global recovery view emerging in Q2 which certainly implies less upward momentum for the dollar after the 3.7% gain in Q1.”
Fed Reassurance to Underpin Risk Appetite
The bank expects that the Federal Reserve will maintain a very expansionary policy in the short term with no change in the bond-purchase programme as it monitors inflation trends.
“Not until around the end of the year will the Fed have a handle on whether the imminent rise in inflation proves transitory or sustained implying no change in QE tapering at least until then.”
MUFG believes that this consistency in message from the Fed will keep US yields down and limit US dollar support.
There would also be net support for currencies such as the Australian dollar.
MUFG notes that there has been a fresh flow of funds into emerging markets after net outflows in March with increased optimism that the Federal Reserve will maintain supportive financial market conditions.
Stronger conditions in emerging markets would also tend to support the Australian dollar exchange rates.