Australian Dollar Forecasts Lowered at CBA

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Commonwealth Bank of Australia has lowered its forecasts for the Australian Dollar against the Dollar and Pound, but holds onto its view that the "next big move" in the Aussie will "be up rather than down".

"We tweak our currency forecasts following our updated central bank views and changes in commodity prices," says Joseph Capurso, Head of International and Sustainable Economics at CBA.

The Dollar is seen to have peaked but is expected to prove resistant to a major selloff that would typically boost Australian Dollar exchange rates. Previously, the pace of decline was expected to be faster, which meant the major Aussie exchange rates had more upside potential in 2024/2025.

Still-high U.S. bond yields are seen supporting the Greenback for a while longer, on account of the Federal Reserve's likely reluctance to cut interest rates owing to signs inflation is taking its time to fall back to target.

"We consider AUD/USD can lift modestly rather than strongly over the next year. One obstacle to large gains in AUD/USD is the large negative interest rate differential between Australia and the U.S.," says Capurso.

Analysts at CBA still maintain a view that the Australian Dollar is "well past" its cyclical lows and "we expect the next big move in AUD/USD will be up rather than down."

An improving global economic backdrop is expected to be a key driver of Aussie upside, including a Chinese revival. Analysts note Hong Kong’s Hang Seng equity index - a proxy for the Chinese economy - is already pointing to such a recovery.

Downside risks to the Aussie Dollar would be another Federal Reserve rate hike and the re-election of Donald Trump as U.S. President, as CBA thinks any wage tensions between the U.S. and China will weigh.

"In what likely would trigger a massive global trade war, Trump has called for 10% tariffs on all imports, 100% tariffs on cars made outside the U.S., and a minimum 60% tariffs on Chinese goods," says Zachary Basu at Axios.

The Reserve Bank of Australia is meanwhile considered a potential upside risk.

"One upside risk to our AUD/USD forecasts is if the Reserve Bank of Australia (RBA) increases the cash rate. Until recently, financial markets were partially pricing a rate hike by the RBA before the end of the year. While we disagree with the argument for rate hikes based on our economic forecasts, if we are wrong and the RBA increases the cash rate at least once, AUD/USD could be higher than our new forecasts," says Capurso.

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A number of investment banks had raised expectations that the RBA would hike interest rates again owing to surprisingly strong quarter-1 inflation.

However, the RBA's May update showed the bar to such a move was set particularly high, resulting in a paring of rate hike expectations and a softening in the AUD.

The next near-term trigger for AUD comes in the form of next week's all-important U.S. inflation release, where an undershoot against expectations can provide a boost for this pro-cyclical currency.

CBA now forecasts AUD/USD to end 2024 at 0.69, down from 0.71 previously. 0.71 is now pencilled in for March 2024, down from 0.73 previously.

For the AUD/GBP exchange rate, the new forecast is 0.5391 at year-end, down from 0.5462. The March 2025 forecast is 0.5462, down from 0.5530 previously.

This translates into a Pound to Australian Dollar forecast of 1.8550 and 1.83.