AUD/USD: What next for the Australian dollar in 2021?

AUD/USD: What next for the Australian dollar in 2021?

  • The Australian dollar rose by more than 9.60% in 2020 and by 40% from its year-to-date low of 0.5510.
  • The pair rose because of the weaker dollar, strong Chinese economy, and higher commodity prices.
  • What is the outlook for the AUD/USD in 2021?

The AUD/USD had a strong performance in 2020. The pair, which is often seen a proxy for China and global commodities, soared by more than 9.65%, becoming one of the best-performing pairs in the world. It also rose by more than 40% from its 2020 low of 0.5510.

AUD/USD 2020 performance

Why the AUD/USD soared

The Australian dollar rose because of three primary reasons. First, it rose because of the strength of the commodities market. Most commodities, including copper, iron ore, and silver, rallied in 2020, driven by strong demand from China. Indeed, the Bloomberg Commodities Index (BCOM) rose by more than 10% during the year.

Bloomberg commodities index

The Aussie is often viewed as a proxy for global commodities. That’s because of the vast natural resources the country is endowed with such as coal, copper, and iron ore.

Second, the AUD/USD pair rose because of the strong performance of the Chinese economy. While the country was the source of the coronavirus pandemic, the government handled it well.

Subsequently, the Chinese economy grew by 3.2% in the second quarter and by 5.2% in the third quarter. That’s in contrast to the sharp declines experienced in countries like the United States and Canada.

China is vital for the Australian economy since it buys more than a third of all the goods it produces. It is also the biggest buyer of the country’s services like education, tourism, and hospitality.

Finally, the AUD/USD roared because of the significant weakness of the greenback. After rising sharply in the first quarter, the US dollar tumbled throughout the year. In total, the dollar index declined by more than 8% in 2020, making it the worst month since 2017.

What next for the Australian dollar in 2021?

The Australian dollar movement will depend on several factors this year. First, it will be determined by how fast the country’s economy will be able to recover. Economists expect it to bounce back by about 4.7% this year, driven by a rebound of the services sector.

A strong recovery could force the Reserve Bank of Australia (RBA) to become hawkish, which will push the Aussie relatively higher.

Second, the AUD/USD pair will also react to the overall sentiment in the market. If the risk-on sentiment remains, it could push it higher. However, there is a possibility that the sentiment will change as investors start to worry about external issues like global debt.

Finally, the currency will react to the strength of the Chinese economy and commodities like copper and iron ore.

AUD/USD technical outlook

AUD/USD technical chart

On the weekly chart, we see that the AUD/USD has been on a strong trend in the past few months. It has managed to move above the 50-week and 25-week exponential moving averages. Similarly, the Relative Strength Index (RSI) has moved to the overbought level of 70.

Therefore, I suspect that the pair will continue rising as investors in forex aim for the next resistance level at 0.800. On the flip side, a move below 0.700 will invalidate this trend.