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Despite being undervalued, the Australian Dollar should fall "materially further" in 2025. But near-term, the exchange rate could find some support.
Commonwealth Bank of Australia says it has recently made large changes to its currency forecasts to account for a renewed 'trade war' in 2025 that envisages a more pronounced outperformance of the U.S. Dollar.
At the same time, "AUD/USD is trading below our estimates of fair value. Despite undervaluation, we forecast AUD/USD will fall materially further in 2025," says CBA analyst Joseph Capurso.
CBA thinks the Australian economy to remain soft over the next six months, and as a result, expect the Reserve Bank of Australia (RBA) to cut its cash rate sooner and by more than the market currently expects.
"If we are right about the RBA, lower Australian interest rates will weigh on AUD/USD, albeit modestly. But we do not expect the Australia minus US 2-year swap rate to weigh as heavily on AUD/USD as it did in 2018 because we expect the FOMC to keep cutting the Funds rate in 2025," says Capurso.
The Aussie Dollar experienced its biggest fall in weeks on Wednesday, November 05, after domestic GDP data undershot expectations, pointing to an economy that might be weaker than initially thought.
ABS data suggested that much of the country's 0.3% quarterly growth was driven by government spending and not the private sector, to which the RBA is attuned.
The odds of a February RBA rate cut rose following the data, sending AUD lower.
CBA now forecasts AUD/USD to fall to 0.62 by mid-2025, ahead of 0.61 by September. AUD/GBP is meanwhile expected to track sideways around 0.52 for much of next year (which equates to GBP/AUD at 1.92).
AUD/EUR is seen steadily appreciating to 0.64 by September, which equates to EUR/AUD at 1.56.
Despite remaining under pressure, short-term price action suggests the AUD/USD exchange rate has rolled into an area of support that can arrest further declines.
Tanmay Purohit, technical strategist at Société Générale, says AUD/USD has extended its decline after breaking below the lower limit of the recent brief range.
Above: AUD/USD at daily intervals with key levels and signals referenced in this article.
"It is not far from the graphical levels of 0.6360/0.6340 representing lows of April / August. Daily MACD is within deep negative territory, denoting a stretched decline," he explains.
Like most USD-based exchange rates, AUD/USD's selloff takes it to extended levels. We have seen pairs like EUR/USD and GBP/USD form a base and consolidate as oversold conditions unwind.
"An initial rebound is not ruled out but reclaiming recent pivot high of 0.6530 is crucial for confirming a larger up move," says Purohit.
"In case the pair fails to defend 0.6360/0.6340, the phase of correction could extend towards 0.6300 and 2023 trough of 0.6270," he adds.