The Australian dollar is expected to face a"difficult year"this year,as concerns about risks to the world economic environment ease and weak domestic factors come into play,according to a new report by HSBC's currency analysts.
"While the strong correlation with the risk on-risk off factor has played in the Australian dollar's favour in 2012,we believe it will be a different story in 2013,"HSBC says it its latest global currency outlook.
The report points out that while the Australian dollar remains high,it was the second worst performer in the G10 group of nations last year.
"We expect it to be a difficult year for the Australian dollar,"it says."This year we believe the combination of a'risk off'environment and a deteriorating fundamental outlook will see the Australian dollar again underperform."
HSBC currency analysts expected the Australian dollar to weaken last year with the concern in the first half about a possible slowdown in industrial production in China,lower interest rates and a fall in world commodity prices.
But the trade-weighted Australian dollar rose by 2.5 per cent between September and November last year despite the 20 per cent fall in the Reserve Bank's commodity price index over the same period.
HSBC says the Australian dollar's resilient performance last year was mainly due to its role as a safe haven when markets are concerned about risk.
"Risk on-risk off dominance meant the Australian dollar has benefitted from this risk-on environment despite its weak fundamentals,"it says.
But it argues that the importance of the"risk on-risk off"factor in demand for the Australian currency will ease this year with domestic economic factors having a greater influence on the currency's performance and concern about the European economy and the US fiscal cliff problems easing.
"Fresh headwinds face the currency at home,"it says.
The Australian dollar has long been supported by large foreign investment during the Australian mining boom,but HSBC forecasts mining investment to peak by mid-2013,levelling out thereafter.
"The cushion of support that foreign direct investment has provided is dwindling,"it says.
