Westpac note on the Fed, China, and the Australian dollar.
- The US economy and the equity market have proved much more resilient to the FOMC’s tightening cycle than earlier anticipated.
- Our expectation for (US) inflation ... 6–month annualised inflation back at 2.0% by end–2023 and the annual rate around 2.0%yr by mid–2024. It is the second half of 2024 and into 2025 where we see risks of inflation re–accelerating in the absence of even a small technical recession. These are risks the FOMC focus on and so will remain cautious of. From 2.0%yr at June 2024, a headline inflation rate around 2.5%yr is likely by mid–2025, with upside risks.
Bolding is mine.
As for the Australian dollar:
- Higher US interest rates and stronger GDP growth are likely to support a slower descent for the US dollar and consequently further weakness in the Australian dollar.
- we now look for USD0.66 at end–2023, USD0.70 end–2024 and USD0.73 end–2025. Notably, not only is the starting point of this revised profile 2 cents weaker at December 2023, but also 4 cents lower at end–2024. Through 2024 we had anticipated a 6 cent lift in AUD/USD, but under these new interest rate differentials (US rate cuts 75bps less in 2024), the lift in the AUD associated with improving global economic conditions will be more constrained. In particular, risks around China should abate assuming policy makers continue their recent push, but only as their actions prove effective. This will support the Australian dollar, particularly in the second half of 2024 and into 2025.
Bolding is mine.
