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  • Writer's pictureCrest Economics

What’s happening with the exchange rate? – Jan 2023

China's reawakening is expected to bring about a fresh wave of demand for key Aussie exports, a trend that is likely to underpin a strong dollar in the months ahead. In particular, Chinese demand is back with an appetite for its usual buffet of Australian education, tourism and business services, this time coupled with waves of inbound investment as well.

Favourable conditions have improved the risk sentiment of investors. Interest rates and commodity exports have aided in this, alongside the lifting of the ban on Australian coal which is expected to feed forward into a stronger dollar in future. Still, tourists remain the largest upside benefit to China's reopening. According to HSBC, Chinese visitors consume more and stay longer, accounting for 27% of visitor expenditure and 21% of nights spent respectively, with both figures following an upward trajectory as tourism flows resume. In addition, Chinese households are sitting on a glut of pandemic saving, which is expected to slam the accelerator on service-led exports. All this is buttressed by more favourable geopolitical relations between the two countries, following a phase of discord that left key Australian exports hung out to dry.

Nonetheless, a variable of uncertainty remains with the recovery of the US economy. Recessionary fears and inflationary pressures remain heightened as high interest rates have ground the economy to a lethargic crawl. Still, China's effect could well have an impact on the US as well. Despite bearish estimates, supportive global conditions could cushion the fall and provide a soft-landing.

As such forward estimates have suggested an upward climbing dollar across 2023, reaching 0.69 by the end of the first quarter and 0.76 by year end.

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