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Fundamental drivers mean the Australian dollar should be at stronger levels, according to one of Australia's major banks.
"The stars look aligned for better AUD levels into year-end, though recent disappointments are fresh in the memory," says a new strategy note from National Australia Bank (NAB).
The note also details the bank's predictions for AUD exchange rates in 2026, which includes a prediction for GBP/AUD to fall materially below the 2.0 marker.
Looking into year-end, there's a hint of frustration amongst NAB's strategists that Australian dollar strength has suffered setbacks.
AUD/USD peaked at 0.6686 earlier in December, which corresponded with a decline in the pound to Australian dollar rate (GBP/AUD) to the psychologically important 2.0 level.
These barriers stood in the way of further gains and the Aussie currency has since retraced some of that strength.
What might be causing the AUD to lag interest rate fundamentals?
Interestingly, NAB points the figures at market jitters over an AI stock market bubble:
"In questioning why AUD/USD is not already stronger, we got another reminder last month that whenever risk sentiment sours, AUD is the G10 currency that typically suffers the most, in the latest instance when the US technology sector took a hit when talk of an AI bubble and excessive valuations reached a new peak, taking global stocks lower in their slipstream.
"Perhaps the November sell-off, in stocks and the AUD, is still a little too fresh in the memory to be ignored."
However, NAB says fundamentals continue to favour upside:
"The interest rate argument for further AUD/USD gains in the run up to year end is compelling."
Strategists explain interest rate differentials have moved in favour of the AUD in recent weeks, dating from the release of the Q3 local CPI data in late October.
Bolstering the AUD outlook is a shift in expectations for the RBA's cash rate to move higher between now and later in 2026. At the same time, the "whole term structure/relative curvature of Australia versus US rates" has moved in favour of a firmer AUD.
"Both are currently consistent with AUD/USD being a couple of cents higher than current spot, above 0.67," says NAB.
At the time of writing, AUD/USD quotes at 0.6604. Amove in AUD/USD to 0.67 is consistent with a GBP/AUD move back to 2.0, and potentially lower.
And what does 2026 bode for the Aussie?
NAB says it forecasts AUD/USD getting above 0.70 next year.
Further gains on key AUD crosses are also anticipated, "justified in large part on relative interest rate ground."
AUD/USD is forecast at 0.69 by March and 0.72 by September 2026.
AUD/GBP is seen at 0.51 by March and 0.52 by September. This translates to a GBP/AUD at 1.96 and 1.92.