Image © Adobe Images
The Australian Dollar is amongst the top picks at Morgan Stanley for 2025.
"In the dollar bloc, we expect AUD to remain a clear outperformer," says a global strategy note from the investment bank.
Strategists think AUD/USD can rise to 0.72 by end-2025 "thanks to its risk sensitivity".
The Aussie Dollar is considered a 'high beta' currency, implying a positive relationship with global stock markets, which rally when investor sentiment is positive.
Morgan Stanley thinks the first year of Donald Trump's second term will be characterised by moderate growth, disinflation, deregulation, and monetary policy easing, all of which are favourable for risk assets.
Although higher trade tariffs are a headwind to growth and AUD in 2025, Morgan Stanley thinks there will be countered by the positive growth backdrop that will be, in part, driven by falling U.S. interest rates.
"Falling real rates should limit USD strength in 2025. JPY and AUD are the top G10 performers," says Morgan Stanley.
Morgan Stanley says AUD will benefit from Australia's "limited trade risk exposures and a relatively hawkish RBA; our economists expect the RBA to first cut only in May 2025, and the RBA cash rate is likely to be the highest in the G10 after the Fed."
Elsewhere in the FX universe, Pound Sterling is tipped to see additional benefits beyond positive risk appetite from limited trade-related concerns and supportive carry. GBP/USD is predicted to rise to 1.34 by year-end 2025. This gives a year-end GBP/AUD forecast of 1.86, down from 1.94 currently.
The Swiss Franc finds itself the ultimate laggard, with EUR/CHF rising to 0.95 by the end of 2025.
Euro exchange rates are to be restrained by rapidly falling interest rates, continued below-trend growth, and the trade risk premium.
Morgan Stanley's economists expect the European Central Bank to continue cutting rates, taking the headline policy rate to below neutral i.e. to a level that becomes stimulative of the economy.
"Indeed, our rates strategists expect the 2-year German yield to compress close to that of Japan," says Morgan Stanley. "This convergence of rates to those of other ‘funding currencies’ is an important EUR-negative catalyst, particularly as low rates stand in contrast to the Fed, which we expect will stop cutting rates nearly 250bp higher at 3.53.75% through 2025."
The bank forecasts EUR/USD will stage a "tepid rally from 1.04 (end-2024) to 1.10 (end-2025)," which fails to keep pace with currencies abroad.