Australian Dollar Gains to Extend says Bank of America

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The Australian dollar should manage to eke out further advances, with the help of a supportive central bank, but the process will be slow as China remains a constraint.

These are the findings of a new update on the Australian Dollar's outlook from Bank of America, which says, "we continue to see the AUD moving gradually higher over the next few quarters."

Sydney-based analyst Oliver Levingston says interest rates differentials between Australia and other regions are set to remain "an especially important tailwind for the AUD and the main reason AUD is likely to move higher against G10 FX crosses by year-end."

"G10 crosses" refers to non-USD Australian Dollar exchange rates and could, for example, cover the Pound to Australian Dollar and Euro to Australian Dollar pairs.

However, the Australian Dollar-U.S. Dollar exchange rate (AUD/USD) is tipped by Bank of America to remain the focus of upside, as the Reserve Bank of Australia (RBA) cuts interest rates later, and slower, than the Federal Reserve.

"We expect the RBA to be the last G10 central bank (ex-Japan) to lower policy rates," says Levingston. He says the country's labour market remains robust, and inflation won't fall fast enough to encourage the RBA to cut interest rates in the near term.

The Aussie Dollar was boosted this week after monthly CPI inflation fell to 3.5% year-on-year in July from 3.8% in June, but the figure was higher than the market expectation for 3.4%, underpinning a view that the disinflation process is sluggish.

Meanwhile, markets are looking for the Fed to cut interest rates in September, with markets even seeing the potential for a 50 basis point cut, which can weigh on the Dollar. Rising odds of a Fed rate cut are meanwhile boosting investor confidence, which is a traditional tailwind for the Aussie Dollar.

Cautious Gains

Nevertheless, any near-term upside won't be fast, and it won't be clean.

"We are reluctant to forecast a 0.70 handle in AUDUSD in 2024 without improvement in the China outlook, of which there is little evidence yet," says Levingston.

He says AUD upside is likely capped by the weak outlook for Australia’s exports to China as the country struggles with structural headwinds that include rising tariffs on Chinese goods in Europe and the U.S., and a struggling domestic proprty market.

Forecasts for the Australian Dollar

Bank of America's long-held outlook for broader USD depreciation in the second half of 2024 means a higher AUD/USD bilateral exchange rate is likely despite China risks.

Analysts hold a year-end 2024 forecast of 0.69 and a year-end 2025 prediction of 0.72.