The Australian dollar's (AUD) rally against its US counterpart (USD) is facing headwinds, according to revised forecasts from the Commonwealth Bank of Australia (CBA). The bank cites a persistent gap in interest rates between the two countries as a key reason for the downgraded outlook.
Slower Climb for AUDUSD:
- CBA strategists now expect the AUDUSD pair to trade sideways for a few months before a potential rise in the latter half of 2024 and into 2025.
- This marks a significant shift from previous expectations of a more robust climb for the AUD.
Interest Rate Differential: The Main Culprit
- The culprit behind the downgraded forecast is the wide interest rate differential between Australia and the US.
- Australian bond yields have remained lower than their US counterparts since 2017. This gap widened further in April as markets adjusted their expectations for US Federal Reserve rate cuts.
- Initially, the Fed was anticipated to cut rates as many as six times in 2024. However, recent market sentiments suggest only two cuts are likely.
Fed's Delayed Easing and Its Impact
- The delayed timing and reduced number of expected Fed rate cuts will likely keep the interest rate differential high until later in the year, according to CBA.
- Their forecasts predict the Fed won't cut rates before November and will only make two cuts this year. In contrast, the Reserve Bank of Australia (RBA) is anticipated to cut rates just once in November.
US Dollar to Weaken, But Not Enough to Boost AUD Significantly
- Despite the anticipated decline in the US dollar later this year, CBA believes it won't weaken enough to significantly bolster the AUD.
- This is because low market volatility, which is typically good for riskier currencies like the AUD, is expected to persist as major economies recover.
- The safe-haven status of the USD benefits from low volatility, making it less attractive to sell even if it weakens.
CBA's Revised Forecasts:
- CBA has adjusted its AUDUSD forecasts downward:
- 0.65 for June (previously 0.66)
- 0.67 for September (previously 0.69)
- 0.69 for December (previously 0.71)
- The US Dollar Index (DXY) is also expected to weaken, but at a slower pace:
- 105.0 for June (previously 102.9)
- 103.3 for September (previously 100.9)
- 101.5 for December (previously 99.5)
The Takeaway:
While the Australian dollar is still expected to appreciate against the US dollar, the pace of its climb will likely be slower than previously anticipated. The persistent interest rate gap and a potential continuation of low market volatility are key factors dampening the AUD's near-term outlook.