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Australian Dollar Q2 Fundamental Outlook

The Australian Dollar has endured a miserable couple of years against its big brother from the United States. Weakness has continued into 2024 so far.

But there might be some better news ahead for Aussie bulls, even if much of it is likely to come as a ‘US Dollar weakness’ story rather than anything wonderful from the Australian economy.

Rising US interest rates and the Greenback’s ‘haven’ status along with broad-based risk aversion have all conspired against the Australian Dollar. The Australian economy has done rather better in troubled times than some of its western peers, but you’d never know it from the AUD/USD chart.

As we head into a new quarter, however, the US Federal Reserve remains quite sure that interest rates will start to come down this year. This has taken a predictable toll on the greenback and seen riskier, growth-linked assets like the Australian Dollar perk up a bit.

Australian borrowing costs remain at their inflation-fighting peaks. While the next move there might be a cut too, the Reserve Bank of Australia will need to be a lot more certain that inflation will return to its target range before it acts.

That certainty will be a while coming. The most recent Australian inflation numbers showed an annualized growth 0f 4.1%. That was much below 2022’s 7.8% peak, but still well above the RBA’s 2-3% mandate. So, the prospect of lower US rates while Australia’s stay put will offer the Aussie some support.

There are also some signs that relations between Australia and major trading partner China are thawing somewhat. Even so there are probably limits to this newfound chumminess thanks in part to Australia’ participation in the controversial ‘AUKUS’ defense arrangement with the United States and Britian, which China hates.

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Significant AUD Gains May Have to Wait

Still, the prospect of a weaker Dollar and a less risk-averse market backdrop should support the Aussie now. But the full effect isn’t likely to be felt until the back end of this year when those Fed rate cuts are expected to come.

Most Australian banks expect AUD/USD to be above 0.70 by the end of 2024 and, if US inflation plays ball and allows the Fed to cut as planned, the Australian Dollar may stabilize and could well start to rise, albeit cautiously.

There are clear risks to this view, however. The path lower for US rates might be longer than the market now hopes, while conflicts in Ukraine and Gaza retain the sad potential to snuff out risk appetite at any point, even if no other flashpoint ignites. It’s worth noting too that the currency is in a longer-term downtrend against the US Dollar which goes back to early 2021. Even if rises are seen this year, they seem unlikely to reverse that.