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The AUD/USD rallied to over 68c in December 2023, but its value has hovered between 64 – 66c in early 2024. A sustained strengthening of the Australian dollar has not played out, with the US dollar maintaining its stability andChina’s economic activity not gaining steam.
However, speculation of rate hikes domestically — in contrast to a commitment to eventual rate cuts in 2024 from the Fed — could spur a recovery of the AUD.
The big question for investors remains: is the AUD likely to go up or down in 2024?
Let’s explore the factors to watch and whether recovery is imminent.
(Related: Will Australia Slip Into A Recession In 2024?)
| Key Takeaways: |
|---|
| The outlook in 2024 is for a strengthening Australian dollar against the US dollar. |
| Financial marketshave swung towards the view that the RBA will increase interest rates. |
| RBA’srate differential with the US Federal Reserve, which is expected to start cutting sooner, may support the AUD’s appreciation. |
Australian Dollar Prediction: 2024.
Barring any major catalysts, the general outlook for the AUD/USD exchange rate in 2024 is cautiously optimistic for a strengthening Australian dollar.
6-Month Forecast For AUD/USD.
Some major banks are forecasting a slight but steady increase in the Australian dollar exchange rate for the first half of 2024:
- Westpac’seconomic reportissued the week of April 29 predicted the AUD would be worth 0.68 US cents by June 2024, and 70c by December.
- NAB’sFX forecastas of May was that the AUD/USD exchange rate would reach 0.69c by June 2024, and 72c by year-end.
- INGis bullishon a rising AUD, forecasting an exchange rate of US$0.66 by the second quarter of 2024, and 66c in Q4, too.
Above: Historical snapshot of bilateral and Trade-Weighted Index (TWI) AUD/USD exchange rates. Note that the TWI is more stable (see below for explanation).
In March, financial markets were factoring in the Reserve Bank of Australia’s (RBA) dovish stance.
Bloomberg reportedthat more real money funds were shorting the AUD than ever before — a near-record 99,3666 short contracts were held as of February 27.
Important!
But markets have shifted again, driven by March quarter CPI figures that reveal Australia’s inflation isn’t slowing as quickly as expected.
Plus, the US Federal Reserve indicated at its May meeting it would still consider cutting rates later this year, despite “a lack of further progress in bringing inflation down”.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
TheRBA yield curve, meanwhile, shows Australia’s money markets are pricing in a rate increase, with the implied yield from cash rate futures rising by around 0.065 basis points by October 2024.
Above: The markets are not pricing in a rate cut until February 2025 (where the blue bar dips below 4.35).
Although investors’ projections of a peak of 4.415 in October is still far short of the 0.25% increase of a typical rate hike — markets don’t see rates dropping below 4.35 until 2025.
Depending on how the Fed moves, the growing divergence with US policy could bolster demand for the Aussie dollar.
12-Month Forecast for AUD/USD.
Looking further ahead, bankers expect the Australian dollar to continue to appreciate against the US dollar:
- Westpac predictsthat the Aussie’s value will increase to 0.72c by June 2025.
- NABputs the AUD/USD at 0.75c by June ’25.
- INGthinks the Australian dollar will remain at US$0.66 until mid-2025.
(Related: Why Is Living In Australia So Expensive?)
How Is The AUD/USD Exchange Rate Measured?
The RBA explains three key ways to measure an exchange rate:
| Bilateral exchange rate | The most common method, represented by currency pairs that quote one currency’s value relative to another ( e.g., AUD/USD). |
| Cross rate | A rate calculated by reference to a third currency. For instance, determining the EUR/AUD by multiplying EUR/USD by AUD/USD. |
| Trade-weighted index (TWI) | Offers a broader yardstick of trends in a currency’s value, by comparing it against the weighted average value of a ‘basket’ of currencies from trading partners (weighted based on the share of trade with those countries). |
Did You Know?
The AUD/USD currency pair often rises and falls along with the price of gold (read our guide to buying gold in Australia).
What Affects The Value Of The Aussie Dollar?
Throughout 2024, drivers of price movements for the Australian Dollar will include:
1. Domestic Economic Conditions.
In particular, investors monitor:
- Interest rates.
- Inflation (CPI).
- Consumer spending data.
- Labour market figures (recentwage growthwas strong but still not on par with inflation).
Above: Latest economic data bolsters the case for interest rate cuts in late 2024.
Interest rates and inflation are particularly important, because:
- When interest rates rise, as now seems more likely(although many forecasts still expect cuts from Q4 2024), our currency delivers a higher return than other major currencies, increasing demand for the Australian Dollar and its value.
- When purchasing power is reduced(i.e. when you get less ‘bang’ for your Aussie dollar compared to a US dollar), the AUD’s value will likely decline.
Of course, a track record of cooling inflation is key to a rate-cutting cycle getting underway.
Did You Know?
The Reserve Bank of Australia(RBA) raised the cash rate to 4.35% in November 2023 and continued to hold at its most recent meeting in March, stating “inflation continues to moderate but remains high.”
According to Westpac’s Chief Economist Luci Ellis, pushing the exchange rate up helps the RBA achieve its aims by putting downward pressure on the price Aussies pay for internationally traded goods and services.
Ellis added that the timing difference in cash rate cuts supports a view that the AUD/USD will appreciate over 2024.
Important!
Fiscal policy, such as therecalibrated stage-three tax cuts, could also stimulate the Australian economy.
2. US Fed’s Interest Rates.
The RBA cash rate currently sits at 4.35%, while the US Federal Reserve’s remains at a22-year high of 5.5%after it decided to hold rates following its May meeting.
Above: The Australian Dollar will likely appreciate if the US Fed cuts rates ahead of the RBA.
Important!
This price differential encourages investor funds to flow out of the Australian economy, increasing demand for the USD and devaluing the Australian dollar.
But the interest rate differential looks to be shifting to favour the Aussie.
- Optimistic view:Three consecutive months of US inflation rises (from January to March 2024) raised fears of a hawkish move by the Fed. But in May Jerome Powell said rate hikes were “unlikely”, and it seems cuts are merely delayed, not ruled out.
- Pessimistic view:If inflation continues to “prove more persistent than expected” and the labor market remains strong, Powell said not cutting was on the table. “It’s really going to depend on the data,” he said.
Generally, signs point to policy easing in the US ahead of a similar move by Australia’s central bank (which isn’t expected to cut till late 2024, if not raise rates again) — meaning investors will start to find Australian assets more attractive.
Did You Know?
The Australian dollar has a floating exchange rate and is considered a dirty float, as the RBA can intervene in the foreign exchange market to influence the price.
3. China’s Economic Slowdown.
The world’s second-largest economy is our largest export market.
But China’s unsustainable property development, growing debt and deteriorating political climate don’t bode well for Australia’s export earnings.
Its economy continues to grow more slowly, despiterecent resultsshowing higher-than-expected industrial production, which grew 7.0% year-on-year, above expectations.
Also positive, China’s factory activity is picking up, expanding for the first time in six months.
Already in 2024:
- Chinese stock markets had one of their worst performing days in years, with the Hang Seng dropping 3.9% and the CSI 300 index declining to a near five-year low.
- Growth forecasts for the Chinese economy range from 4-4.9%, even lower than the modest 5.2% witnessed in 2023.
- Export demand for Chinese goods looks to be declining as global GDP growth remains muted.
- Domestic spending has become more cautious, with no indication of major government stimulus measures to come.
A recent move improving sentiment among investors was an announcement by the People’s Bank of China to cut the reserve ratio requirements (RRR) for banks by 50 basis points from February 5, adding $1 trillion yuan to the economy.
Important!
Not only does a poorly performing Chinese economy reduce demand for the Aussie dollar, it can encourage capital flows to the US, further strengthening the greenback.
(Related: Interest Rate Forecast: Will The Hikes Stop In 2024?)
4. Terms Of Trade And Commodity Prices.
An increased demand for Australian exports means an increased demand for AUD. But export volumes and prices hinge on global demand.
Iron ore is Australia’s largest export, and China is our largest export market.
(Related: Best Share Trading Platforms In Australia).
Whether we like it or not, China’s thirst for our products affects our prosperity and currency strength.
Volatility in commodity prices driven by a range of other factors (e.g., supply chain disruptions or natural disasters) can also create volatility in the AUD foreign exchange rate.
- How much Australian exporters can charge for their goods directly impacts how many Australian dollars are required to purchase the same quantities. More demand for our currency lifts the exchange rate.
- Valuable commodity exports incentivise foreign investment in companies producing those commodities. Additional capital inflow from overseas can further boost demand for the Aussie.
Important!
Of course, some exporters and multinationals benefit from a softer AUD, through more competitive prices or from the favourable conversion of offshore earnings into USD.
5. Global Stability And Geopolitics.
Australia has a stable government but our financial markets are not immune to increasing instability globally.
The US Dollar’s “safe haven” status can give its currency an advantage when ongoing global crises rattle investors.
Important!
A so-called ‘risk-on’ currency like the AUD doesn’t tend to perform well in times of increased fear, uncertainty, and doubt.
Currency swings could be impacted in 2024 by:
- The US Presidential election and how the race influences existing tensions with China.
- The Russian invasion of Ukraine, which has contributed to increased global oil and gas prices (affecting inflation), and continues to negatively impact sentiment.
- Middle Eastern conflicts, including the Israeli-Palestinian conflict, escalation of tensions between Israel and Iran, and recent attacks by Houthi militants on civilian ships in the Red Sea are significantly disrupting international trade and fuelling ongoing concern about oil prices, which could increase inflationary pressure.
Did You Know?
A January 2024 report on the views of leading chief economists from the World Economic Forum found that 69% expect the pace of geoeconomic fragmentation to accelerate this year, and 87% expect significantly increased volatility in the global economy.
How Stable Is The AUD To USD Exchange Rate?
Historically, the AUD/USD exchange rate has averaged around 0.70-0.75c.
However, it’s dropped sharply on a number of occasions, such as following the attack on New York’s Twin Towers in 2001 and recently during the COVID lockdowns in 2020 when it fell to an 18-year low of 0.55 US cents.
The Australian dollar was first floated (made available on the Forex market) in December 1983.
It appreciated against the US dollar in the decade up to 2011, largely driven by Australia’s mining boom, increasing from below US$0.50 in 2001, reaching parity in 2010, and then a peak of over $1.10 in 2011.
(Related: How To Buy Bonds In Australia).
After starting 2023 around the US$0.68c range, the Australian dollar weakened throughout the year, primarily because both local and global economic conditions were not positive, and our currency is risk-sensitive.
Did you Know?
Did You Know? When markets fear a global recession, investors shy away from the Australian Dollar in favour of the US Dollar, a “safe haven”. This reduces the demand for the AUD on the foreign exchange markets, weakening its exchange rates.
Will The Australian Dollar Exchange Rate Strengthen In 2024?
Broadly, the predictions point to a rising AUD relative to the USD, but it’s yet to be seen if this optimism is warranted.
How other advanced economies perform and manage their monetary policies will be a key influence on the Aussie’s value.
As ING’s AUD/USD 2024 outlook stated:
“While we think the Aussie dollar should have an edge over other pro-cyclical currencies based on domestic factors and sharp undervaluation, external drivers – namely US yields, global risk sentiment and China’s economic outlook – will effectively dictate the big bulk of AUD/USD moves in 2024.”
Jody
