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Crédit Agricole has upgraded its forecasts for the Australian Dollar, citing a more resilient domestic policy backdrop and constructive central bank dynamics.
The upgrade comes after the Reserve Bank of Australia (RBA) surprised markets by holding rates steady at its July policy meeting last week, despite previously signalling a possible cut as recently as May.
The decision to hold rates steady means domestic interest rate expectations have evolved in AUD's favour: "The RBA surprised markets with a decision to hold rather than cut at the July meeting, particularly given earlier dovish signals," said David Forrester, FX Strategist at Crédit Agricole.
Last week, we reported that both Bank of America and Société Générale hold constructive stances on the Aussie Dollar's outlook owing to the RBA's latest policy stance.
While economists at these investment banks still expect further rate cuts, they now anticipate a slower pace of easing.
The economists also note the importance of external drivers, such as China and global investor sentiment, as potentially being more influential than domestic interest rate policy in shaping the currency’s trajectory.
"We still think that global risk factors will play a more important role for the currency than domestic policy, which has been largely true across most G10 currencies," says Forrester.
Of particular significance is the outlook for U.S. monetary policy. Recent benign inflation data and weaker economic indicators have prompted Crédit Agricole to bring forward its forecast for the next Federal Reserve rate cut and lower its terminal rate projection.
Lower interest rates at the Federal Reserve are stimulatory for the U.S. and global economies and good for stocks, all of which the Aussie Dollar enjoys a positive correlation.
"It may take a few months for that macro picture to resolve," says Forrester. "But RBA easing against this backdrop, rather than a clear negative growth shock, should mean FX price action looks more like it does under a dovish policy shock."
Based on this outlook and the bank's proprietary clustering framework, Crédit Agricole expects the Australian dollar to be among the better-performing G10 currencies in the coming months.
"Our clustering framework suggests that the clearest outperformers in that scenario should be NZD, the Scandis, and AUD in that order," says Forrester.
The bank has accordingly revised its AUD forecasts slightly higher. It now sees the Australian dollar at $0.66 in three months, $0.67 in six months, and $0.68 in twelve months, making for modest increases from previous projections.