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Analysts at Commerzbank predict further downside.
The Australian dollar is expected to weaken in the coming months as the Reserve Bank of Australia (RBA) finally embarks on a meaningful rate cutting cycle, according to a new report from Commerzbank Research.
The RBA cut its cash rate for the first time in this cycle, bringing an end to the longest rate hike cycle in the past 30 years.
The RBA's decision to lower rates follows 33 months of tightening, with a cumulative increase of 4.25%. However, despite the aggressive hikes, the peak interest rate remains the lowest in three decades, the report noted.
AUD Faces Continued Downward Pressure
While the Australian dollar has recovered slightly against the US dollar in recent weeks, analysts attribute this mainly to USD weakness rather than fundamental AUD strength.
“Since around mid-January, the Aussie has recovered somewhat against the US dollar, after having depreciated sharply in the preceding months,” the report states. “However, the rebound in recent weeks is more likely due to the pronounced weakness of the US dollar.”
Against most other G10 currencies, the AUD has continued its decline.
Analysts at Commerzbank predict further downside, with AUD-USD projected to fall to 0.60 by the end of 2025 and 0.58 by late 2026.
RBA Expected to Cut Faster Than Markets Anticipate
Commerzbank Research forecasts that the RBA will continue cutting rates faster than the market currently expects, with a projected cash rate of 3.5% by Q3 2025.
The market has priced in a slow pace of rate reductions, but Commerzbank analysts disagree. “At its February meeting, the RBA explicitly stated that the market should not assume that the first cut would necessarily be followed by further cuts,” the report explains. “However, given the continued weakness in business sentiment indicators and the persistently low level of consumer confidence, we continue to expect faster moves.”
Labour Market Resilience and China’s Economic Slowdown
Despite rising interest rates over the past 33 months, Australia's labour market remains surprisingly strong. Employment growth has been resilient, showing only slight signs of slowing, which is unusual compared to past rate hike cycles.
“The exceptional strength of the labour market is also reflected in job growth,” the report highlights. However, weak productivity and strong wage growth could pose risks for inflationary pressures moving forward.
Adding to AUD’s headwinds, China’s economic slowdown is expected to weigh heavily on Australian exports. As Australia’s largest trading partner, China’s weak demand for commodities could further pressure the AUD. “Over the medium term, the continued weakness of the Chinese economy is also likely to weigh on growth and, in particular, on Australian exports,” the report notes.
Market Outlook: More Downside Ahead
Analysts warn that the Australian dollar is likely to depreciate significantly, especially against a strengthening Euro. Commerzbank forecasts the EUR-AUD exchange rate to rise from 1.67 in mid-2025 to 1.90 by late 2026, signaling a sharp decline in AUD’s relative value.
With faster-than-expected rate cuts, global economic uncertainties, and slowing Chinese demand, the AUD could face further downside risks in the coming months. “We continue to expect a longer-term weaker AUD in the coming months,” Commerzbank analysts conclude.