Currency analysts at JPMorgan backed gains in the Australian dollar in the coming months, saying Australia's record trade surplus would provide fundamental support.

 

In a world where raw materials are scarce and commodity prices are high, foreign exchange markets are increasingly responsive to trade dynamics, analysts at the investment bank said.

 

"We remain constructive on the Australian dollar, especially the cross," said JPMorgan currency strategist Patrick R Locke.

 

JPMorgan's research found that broader foreign exchange performance has become substantially more aligned with the direction of trade flows, that is, currencies tend to appreciate with surpluses relative to their long-term averages, and vice versa.

 

 

 

They found that the difference in trade flows between G10 surplus and deficit currencies has never been more pronounced. Surplus countries are considered to be those with large trade surpluses, including Australia, Canada and Switzerland.

 

Meanwhile, the currencies of net importers such as the euro zone, the UK and Japan underperformed.

 

The Australian Bureau of Statistics reported in August that the seasonally adjusted surplus in goods and services rose by $2.654 billion to $17.67 billion in June.

 

The record trade surplus was driven by soaring export values of commodities such as natural gas, iron ore and gold.

 

"The terms of trade are good for the Aussie, especially on energy exports," Locke said.

 

He added: “We remain constructive on the Aussie, especially on crosses, as the economy’s strong supply-side performance during the pandemic should mitigate the risk that the RBA will have to tighten excessively, and its commodity exporter’s Status also provides natural isolation from the forces of stagflation."

 

JPMorgan strategists thus opened a trade that would generate profits if the euro fell against the Australian dollar.

 

"Given our bearish bias on the euro, we believe any risk-prone trade is best done against the euro rather than the dollar," Locke said in a note this week.

 

The investment bank's foreign exchange strategy team has taken a "long" position in AUD/NZD to express their expectation that the Australian dollar will outperform.

 

JPMorgan's "inside view" is that AUD/USD will rise to 0.70 by the end of the year, while it expects AUD/USD to rise to 0.72 and 0.74 by the end of the first quarter of 2023 and the end of June, respectively.

 

They forecast GBP/USD at 1.15, 1.16 and 1.17, meaning GBP/AUD is expected to be 1.64, 1.61 and 1.58.