The Australian dollar has been a strong performer in recent months and climbed to a 30-month high against the U.S. dollar last week.
While this is great news for importers and international travellers (when they can travel), it is the opposite for exporters like Graincorp Ltd (ASX: GNC) and those that generate the majority of their sales in U.S. dollars such as Appen Ltd (ASX: APX).
The bad news for the latter group is that the economics team at Westpac Banking Corp (ASX: WBC) is tipping the Australian dollar to continue to strengthen.
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What is Westpac saying?
According to the latest Westpac Weekly economic report, its team believe the Australian dollar is on track to hit 80 U.S. cents in 2021.
Westpac's Chief Economist, Bill Evans, commented: "The steady rise in the AUD since mid–year, when it was trading around USD0.68 has been due to rising iron ore prices (up from around US$80/t to US$145/t); ongoing momentum in China as the government seeks to restore positive growth for the year; Australia's success in containing the virus; a boost to global optimism with the advent of successful vaccines; and positive surprises around Australia's recovery and lift in consumer and business confidence since the recession."
"There is understandable uncertainty about iron ore prices but the other factors seem set to roll into 2021 supporting our long– held USD0.80 target for AUD by end 2021," he added.
Mr Evans points out that nearly all cycles in our currency are two to four years in length and generally are linked to global growth and particularly China's growth and policy cycle.
Even higher in 2022?
Mr Evans believes 80 cents in 2021 is a safe bet and suspects the Australian dollar could go even higher in 2022.
He commented: "The question is whether this momentum can extend into 2022. With the AUD having bottomed out in March 2020, a 'normal' two year plus cycle sees the upswing lasting well into 2022."
Furthermore, Westpac believes policy tightening in China and the developed world is unlikely, which rules out "an abrupt downward adjustment to the AUD."
"For now, we are comfortable to project the upward momentum in AUD into 2022 reaching a high of USD0.82 before flattening off in the second half although there are clear upside risks to this scenario," he concluded.
