CBA cuts forecasts as global growth outlook soursGlobal economy poses risks to RBA policy outlook AUD/USD seen back near 2020 lows by mid-2023 GBP/AUD seen topping out as AUD/USD bottoms

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The Australian Dollar is at risk of a setback that could see it trading down near to some of its lowest levels against the Pound since the onset of the pandemic, according to downgraded forecasts from Commonwealth Bank of Australia.

Australia’s Dollar has been a middle of the road performer among currencies in the G10 grouping thus far in 2022 but Commonwealth Bank of Australia sees it and the New Zealand Dollar as being among the most vulnerable to a global economic outlook that has soured rapidly in recent months.

“The weaker global growth outlook and the associated rise in uncertainty will weigh on AUD more than GBP in our view,” says Carol Kong, a currency strategist and economist at Commonwealth Bank of Australia.

“We expect Australian key commodity prices will fall by a large 40% (an input to our AUD/GBP fair value equation) and pull AUD/GBP lower (charts 4 and 5),” Kong and colleagues said on Thursday.

Source: Commonwealth Bank of Australia.

The deterioration of the global growth outlook is being augmented by central banks across the world, most of which are in the process of lifting interest rates with the specific intention of slowing demand growth within their own economies in order to rein in runaway inflation rates.

That inflation began on the supply side of the commodity market where disruptions such as those caused by governmental responses to the coronavirus and Russia’s ongoing invasion of Ukraine led prices to surge persistently in a turn of events that has backed many central banks into a corner.

While central banks are hoping to merely cool economies by just enough to bring demand back into balance with reduced levels of supply, their interest rates are blunt tools and so the risk is of greater harm than they intend.

“The significant central bank tightening will slow the global economy sharply, thereby weighing on AUD/USD,” Kong and colleagues said.

The Federal Reserve is widely expected to lift its interest rate the furthest this year but the risks posed to the U.S. economy by that tightening of financial conditions will have implications for all other economies and also for the prices of many assets including commodities.

Source: Commonwealth Bank of Australia.

“Furthermore, we see more scope for market pricing for RBA rate hikes to adjust lower compared to that for the Bank of England (BoE) rate hikes which will be another weight on AUD/GBP,” Kong wrote in summary of CBA’s new forecasts.

The deteriorating global economic backdrop is perceived as more bearish for the Australian Dollar than for the Pound because the Aussie currency and economy have a greater sensitivity to changes in commodity prices.

But much still depends on how the UK economy holds up in comparison through the remainder of this year and in 2023.

“We cut our AUD/GBP forecasts for 2022 and the bulk of 2023. We now expect AUD/GBP will fall further to 0.53 [GBP/AUD: 1.8867] by June 2023 before recovering,” Kong said on Thursday.

“AUD/GBP could be stronger than we forecast if markets raise their expectations for the BoE to cut interest rates. We now expect the UK economy will fall into a recession which will prompt the BoE to begin an easing cycle in mid-2023. The UK is at risk of experiencing stagflation in our view,” she added.

Source: Commonwealth Bank of Australia.

CBA downgraded forecasts for the Australian Dollar relative to many currencies this week and now looks for GBP/AUD to end the year at 1.80 while the main Australian exchange rate, AUD/USD, is expected to fall to 0.65.

The Pound to Australian Dollar rate is then seen rising further before peaking around 1.88 in the middle of 2023, and just at the point when the AUD/USD pair is expected to bottom out near 0.62, which is near to the lows plumbed at the onset of the pandemic in early 2020.

“The catalyst for our new forecasts is the persistence of high inflation well above their inflation targets in the Anglosphere and Western Europe (the ‘west’) (chart 1). Central banks are on a path to crunch demand to pull down inflation back to target. Even if the cost to employment is high,” CBA’s head of international economics, Joseph Capurso, wrote separately earlier this week.

“The coming sharp slowdown in the world economy will be a weight on AUD/USD because it is very sensitive to global forces. In addition, as noted above, we consider the RBA will not increase the cash rate as much as market pricing. If we are right that market pricing for the RBA corrects lower, the Australia minus US two year OIS differential at around ‑120bp will be a large weight on AUD/USD," he added.

Above: Pound to Australian Dollar rate and AUD/USD shown at weekly intervals.