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Confidence in further Australian dollar upside is building, but one seasoned analyst is cautious of hype.
"This speculation is overdone," says Jane Foley, Senior FX Strategist at Rabobank in London.
The Aussie has bounced against the dollar and risen against the euro and pound through November on account of signs the Reserve Bank of Australia (RBA) won't cut interest rates any further.
In fact, markets are starting to build bets that the next move will be an interest rate rise, most likely in the second half of next year.
This shift in interest rate expectations, from cuts to hikes in the space of a couple of weeks, can be a potent source of support for a currency, and this is reflected in AUD gains in November and December.
"The move in the AUD does highlight the buoyancy of recent Australian economic data and the relative swiftness at which market expectations on the direction of RBA rates have turned around," says Foley.
But she warns that rate hike speculation will eventually be questioned, and "we continue to expect only a modest appreciation of the currency pair into next year."
There are two reasons for caution on AUD upside:
1) Rabobank says potential headwinds to the Australian economy stemming from China.
"China is Australia’s largest export partner, and it is possible that China’s attempts to tackle deflation and industrial overcapacity will create headwinds for Australia’s economy," says Foley.
2) Central bank rate hiking expectations are not unique:
"The RBA is not the only G10 central bank that has been caught up in market speculation regarding the risks of a rate hike in 2026," says Foley.
She cites examples of the RBNZ and Riksbank, while it's broadly acknowledged that the ECB, SNB and BoC may already have completed their respective rate hiking cycles.
And when it comes to FX, it's divergence in policy that really gets a currency moving. And if other central banks are in a similar spot as the RBA, then there's actually limited scope for AUD-supportive divergence in policy to drive through gains.
"Their next move in rates could also be a hike. This speculation will limit scope for additional AUD upside on the crosses," says Foley.
Rabobank continues to forecast "only a modest push higher in AUD/USD to 0.69 on a 12-month view."