The bank expects the AUD to appreciate in the coming weeks due to favourable rate differentials and USD depreciation. However, significant gains are likely to be constrained by the weak economic outlook for China as well as existing bullish positioning in the AUD.
Bullish drivers:
- Narrowing rate differentials between AUD and the USD are expected to see gradual upside in AUDUSD over the next few quarters, with a year-end 2024 forecast of 0.69 and a year-end 2025 forecast of 0.72. With the RBA maintaining a hawkish stance, particularly after its August meeting, means delayed rate cuts.
- The bank anticipates a weaker USD in the second half of 2024, which is expected to support the AUDUSD regardless of concerns about China.
Headwinds:
- The upside for the AUD is capped by the weak outlook for Australia's exports to China, particularly iron ore. A 0.70 handle in AUDUSD is unlikely without significant improvement in China's economic outlook. Current indicators, such as China's new home sales and credit growth, remain weak, dampening demand for Australian exports.
- AUD positioning is currently the longest in G10. There are some risks around AUDNZD longs, with positioning driven by both Hedge Funds and Real Money. The options market shows long positioning in AUD, but futures positioning is short, adding complexity to the overall outlook.