AUD forecast to strengthen in 2023Domestic property market fears overhypedChina recovery to supportAus economic growth to eclipse U.S., UK and EU

Image © Adobe Images

National Australia Bank is forecasting a stronger Australian Dollar in 2023 as the domestic economy outperforms those of the U.S., UK and Eurozone.

In a year-ahead research note, the lender sees Australian Dollar strength emerging against the Pound, Dollar, Euro and a host of other G10 rivals as the domestic currency shakes off the headwinds posed by China and the Reserve Bank of Australia's cautious approach to raising interest rates.

NAB forecasts a mild recession in the U.S. in 2023, but crucially from an Aussie Dollar perspective, no recession in Australia is expected, although growth will be slower than registered in 2022.

NAB's economic forecasts for the coming year paint a picture of distinct Australian economic outperformance that would ultimately translate into outperformance in Australian Dollar exchange rates.

Eurozone growth is forecast at 0.0% in 2023, the UK's growth at 0.1% and that of the U.S. at 0.2%, but for Australia growth of 1.2% is expected.

"Unemployment remains near 50-year lows and the NAB business survey sees businesses reporting profitability and trading conditions at levels that are rarely exceeded," says Ivan Colhoun, Chief Economist at NAB.

A potential area of concern is Australia's housing market where the RBA's recent interest rate hikes have resulted in house price declines, but NAB is not expecting a more sinister market decline.

"House prices still remain around 17% higher than pre-COVID levels and consumers report low concerns about becoming unemployed," says Colhoun.

Above: Housing interest payments as a share of income. "Mortgage repayments to rise sharply in 2023" - NAB.

The RBA has raised interest rates by 3 percentage points since May but has since slowed down its hiking cycle as it believes the impact of these hikes is yet to be felt on the economy.

There is a likelihood that Australia's terminal interest rate is set at lower levels than those in the U.S. and Britain where central banks continue to hike by historically large increments.

This could leave the Australian Dollar without interest rate support as global capital tends to flow from lower interest rate jurisdictions to higher interest rate jurisdictions in what is described as the 'carry trade'.

But for the Australian Dollar, it is domestic economic outperformance combined with a Chinese economic recovery that will outweigh any interest rate disadvantage in 2023.

China has recently accelerated the pace at which it moves away from its zero-Covid policy and NAB expects a 2023 economic recovery in Australia's most important trading partner to be supportive.

"Importantly for markets, the soft pivot towards living with Covid is happening more quickly than expected, whereas prior to recent developments most analysts were pencilling in a pivot starting after the winter in March/April. CNY, the AUD, and commodity prices have rallied sharply over the past few weeks," says Colhoun.

China is Australia’s largest partner with Australian exports worth A$189BN, or 36.4% of the total.

"Stimulus is likely to underpin demand for commodities, while more free-flowing international movement will also see a more meaningful recovery in tourism and foreign student flows to Australia in 2023," says Colhoun.

NAB forecasts GBP/AUD to be at 1.72 by the end of March 2023, 1.67 by the end of June, 1.72 by the end of September and a return to 1.67 by year-end. It is currently quoted at 1.8030.

Their forecast profile for AUD/USD is 0.70, 0.72, 0.74 and 0.75. It is currently quoted at 0.6865.

For the Euro to Australian Dollar exchange rate the profile is 1.52, 1.49, 1.54 and 1.54. It is currently quoted at 1.5516.

(If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)