Last updated: September 3rd, 2024
The AUD/USD rallied to over 68c in December 2023, but its value has hovered between 64 – 66c in early 2024. A sustained strengthening of the Australian dollar has not played out, with the US dollar maintaining its stability and China’s economic activity not gaining steam.
However, the Aussie has rallied following US recession fears in August that tumbled global stock markets and heralded rate cuts by the Federal Reserve, in combination with a hawkish tilt by the Reserve Bank of Australia (RBA).
Let’s explore the factors to watch and find out whether the Aussie will gain more ground.
| Key Takeaways: |
|---|
| The outlook in 2024 is for a strengthening Australian dollar against the US dollar, bolstered by upside surprises to inflation and RBA’s higher-for-longer narrative. |
| Financial markets may be underpricing the potential for an increase in the cash rate. |
| RBA’s rate differential with the US Federal Reserve, which is expected to start cutting sooner, may support the AUD’s appreciation. |
Tip: Zoom out for better historical context of AUD/USD performance.
Australian Dollar Prediction: 2024-25.
Barring any major catalysts, the general outlook for the AUD/USD exchange rate for the remainder of 2024 and into 2025 is cautiously optimistic for a strengthening Australian dollar.
(Related: Will Australia Slip Into A Recession In 2024?)
6-Month Forecast For AUD/USD.
Some major banks are forecasting a slight but steady increase in the Australian dollar exchange rate for the first half of 2024:
- Westpac’s economic report issued the week of June 10 predicted the AUD would be worth 0.67 US cents by December 2024 and rise to 68c in Q1 2025..
- NAB’s FX forecast as of August was that the AUD/USD exchange rate would reach 0.69c by December 2024 and 0.71c by March 2025.
- ING is forecasting the exchange rate will remain steady at US$0.67 by Q4 2024, with a slight decline to 66c by March 2025.
In March this year, financial markets were factoring in the RBA’s dovish stance.
Bloomberg reported that more real money funds were shorting the AUD than ever before — a near-record 99,3666 short contracts were held as of February 27.
Important!
But markets shifted again, driven by monthly CPI indicator figures heading in the wrong direction between March-May that rang alarm bells re potential rate hikes.
In April-May, Australian money markets priced in higher expectations of a cash rate rise, and delayed cuts out to 2025.
Since then:
- The US Federal Reserve held rates in July, but indicated it would consider cutting rates in September.
- US jobs data from July revealed an unexpected rise in unemployment in line with the Sahm rule — a reliable recession indicator.
- Global markets briefly saw massive losses based on recession fears, a tech stock pullback and the unwinding of yen carry trades.
- Australia’s central bank also held its rate at 4.35% in August — and delivered a statement that cautioned inflation “remains too high”.
- The monthly CPI dropped to 3.5% YoY in July, giving traction to calls for expedited rate relief from the RBA.
Multiple cuts in the US this year are all but assured, to guide its economy to a soft landing. The Fed Chair Jerome Powell said in a speech on August 24 that: “the time has come for policy to adjust.”
The Australian dollar saw an immediate boost against the greenback following Powell’s statement, trading around US$0.679. Could it break, and remain, above 68c in the coming months?
Despite RBA Governor Michele Bullock saying in August that rate cuts were off the table for at least six months, it’s clear there’s scepticism that our central bank can hold out in the context of global policy easing.
In addition to the US, the following economies have initiated cutting cycles in recent months:
- United Kingdom.
- The EU.
- China.
- Canada.
- New Zealand.
- Switzerland.
- Denmark.
As of late August, traders on the Australian market were once again factoring in at least one RBA rate cut before year-end. Bullock had earlier described market expectations as “a little bit ahead of themselves.”
Above: Traders are optimistic about policy easing, expecting the RBA to lower rates by 25 basis in 2024.
Depending on how aggressively the Fed moves, the growing divergence with US policy could bolster demand for the Aussie dollar.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
In the near-term, ING FX strategist Francesco Pesole said a rally in the AUD/USD was possible if the RBA remains hawkish.
Above: Historical snapshot of bilateral and Trade-Weighted Index (TWI) AUD/USD exchange rates. Note that the TWI is more stable.
12-Month Forecast for AUD/USD.
Looking further ahead, bankers expect the Australian dollar to continue to appreciate against the US dollar:
- Westpac predicts that the Aussie’s value will increase to 0.71c by December 2025.
- NAB puts the AUD/USD higher at 0.75c by December ’25.
- ING thinks the Australian dollar will be stuck at US$0.66 until year-end 2025.
(Related: Why Is Living In Australia So Expensive?)
How Is The AUD/USD Exchange Rate Measured?
The RBA explains three key ways to measure an exchange rate:
| Bilateral exchange rate | The most common method, represented by currency pairs that quote one currency’s value relative to another ( e.g., AUD/USD). |
| Cross rate | A rate calculated by reference to a third currency. For instance, determining the EUR/AUD by multiplying EUR/USD by AUD/USD. |
| Trade-weighted index (TWI) | Offers a broader yardstick of trends in a currency’s value, by comparing it against the weighted average value of a ‘basket’ of currencies from trading partners (weighted based on the share of trade with those countries). |
Did You Know?
The AUD/USD currency pair often rises and falls along with the price of gold (read our guide to buying gold in Australia).
What Affects The Value Of The Aussie Dollar?
Throughout 2024, drivers of price movements for the Australian Dollar will include:
1. Domestic Economic Conditions.
In particular, investors monitor:
- Interest rates.
- Inflation (CPI).
- Consumer spending data.
- Labour market figures (recent wage growth was strong but still not on par with inflation).
Above: Latest economic data challenges the case for interest rate cuts in late 2024.
Interest rates, inflation and unemployment are particularly important, because:
- When interest rates rise, as now seems less likely (although many forecasts still expect cuts from Q4 2024), our currency delivers a higher return than other major currencies, increasing demand for the Australian Dollar and its value.
- When purchasing power is reduced (i.e. when you get less ‘bang’ for your Aussie dollar compared to a US dollar), the AUD’s value will likely decline.
- Low unemployment suggests a robust economy and strengthens the currency.
Of course, a track record of cooling inflation is key to a rate-cutting cycle getting underway.
Did You Know?
The Reserve Bank of Australia (RBA) raised the cash rate to 4.35% in November 2023 and has held at that level — including at its most recent August meeting — due to inflation “proving persistent.”
According to Westpac’s Chief Economist Luci Ellis, pushing the exchange rate up helps the RBA achieve its aims by putting downward pressure on the price Aussies pay for internationally traded goods and services.
Ellis added that the timing difference in cash rate cuts supports a view that the AUD/USD will appreciate over 2024.
Important!
Fiscal policy, such as the recalibrated stage-three tax cuts, could also stimulate the Australian economy.
2. US Fed's Interest Rates.
The RBA cash rate currently sits at 4.35%, while the US Federal Reserve's remains at a 22-year high of 5.5% after it decided to hold rates following its August meeting.
Above: The Australian Dollar will likely appreciate if the US Fed cuts rates ahead of the RBA.
Important!
This price differential encourages investor funds to flow out of the Australian economy, increasing demand for the USD and devaluing the Australian dollar.
But the interest rate differential looks to be shifting to favour the Aussie.
- Optimistic view: In August, Jerome Powell signalled cuts were likely from September, and markets priced in up to 125 basis points of cuts in ‘24 .
- Pessimistic view: Powell didn’t confirm the exact timing or extent of cuts to be delivered in the second half of 2024 — saying it depends on the incoming data.
Generally, signs point to policy easing in the US ahead of a similar move by Australia’s central bank (which isn’t expected to cut till late 2024 or Q1 2025, if not raise rates again) — meaning investors will start to find Australian assets more attractive.
Did You Know?
The Australian dollar has a floating exchange rate and is considered a dirty float, as the RBA can intervene in the foreign exchange market to influence the price.
3. China's Economic Slowdown.
The world’s second-largest economy is our largest export market.
Its economy continues to grow more slowly, despite an increase in industrial profits in July. Data shows industrial production slowed for a third straight month in August, on the back of dismal bank lending indicators.
Already in 2024:
- Chinese stock markets had one of their worst performing days in years, with the Hang Seng dropping 3.9% and the CSI 300 index declining to a near five-year low.
- Growth forecasts for the Chinese economy range from 4-4.9%, even lower than the modest 5.2% witnessed in 2023.
- Export demand for Chinese goods looks to be declining as global GDP growth remains muted.
- Domestic spending has become more cautious, with no indication of major government stimulus measures to come.
A recent move improving sentiment among investors was an announcement by the People’s Bank of China to cut the reserve ratio requirements (RRR) for banks by 50 basis points from February 5, adding $1 trillion yuan to the economy.
(Related: Best Share Trading Platforms In Australia).
An August market outlook report from Commbank said recent Chinese property-related announcements and rate cuts by its central bank were encouraging:
Important!
Not only does a poorly performing Chinese economy reduce demand for the Aussie dollar, it can encourage capital flows to the US, further strengthening the greenback.
(Related: Interest Rate Forecast: Will The Hikes Stop In 2024?)
4. Terms Of Trade And Commodity Prices.
An increased demand for Australian exports means an increased demand for AUD. But export volumes and prices hinge on global demand.
Iron ore is Australia’s largest export, and China is our largest export market. Iron ore prices hit a seven-week low in early June due to softening Chinese demand for steel.
Important!
China’s steel production dropped by 9% in July compared to the same time last year, and further declines are predicted for August.
Whether we like it or not, China’s thirst for our products affects our prosperity and currency strength.
Volatility in commodity prices driven by a range of other factors (e.g., supply chain disruptions or natural disasters) can also create volatility in the AUD foreign exchange rate.
- How much Australian exporters can charge for their goods directly impacts how many Australian dollars are required to purchase the same quantities. More demand for our currency lifts the exchange rate.
- Valuable commodity exports incentivise foreign investment in companies producing those commodities. Additional capital inflow from overseas can further boost demand for the Aussie.
Important!
Of course, some exporters and multinationals benefit from a softer AUD, through more competitive prices or from the favourable conversion of offshore earnings into USD.
5. Global Stability And Geopolitics.
Australia has a stable government but our financial markets are not immune to increasing instability globally.
Important!
A so-called ‘risk-on’ currency like the AUD doesn’t tend to perform well in times of increased fear, uncertainty, and doubt.
Currency swings could be impacted in 2024 by:
- Whether the US achieves a soft landing supported by expected rate cuts.
- The US Presidential election and how the race influences existing tensions with China.
- The Russian invasion of Ukraine, which has contributed to increased global oil and gas prices (affecting inflation), and continues to negatively impact sentiment.
- Middle Eastern conflicts, including the Israeli-Palestinian conflict, escalation of tensions between Israel and Iran, and recent attacks by Houthi militants on civilian ships in the Red Sea.
Increased geopolitical turmoil can significantly disrupt international trade and fuel ongoing concern about oil prices, which could increase inflationary pressure and a flight-to-safety by investors.
Did You Know?
A January 2024 report on the views of leading chief economists from the World Economic Forum found that 69% expect the pace of geoeconomic fragmentation to accelerate this year, and 87% expect significantly increased volatility in the global economy.
How Stable Is The AUD To USD Exchange Rate?
Historically, the AUD/USD exchange rate has averaged around 0.70-0.75c.
However, it’s dropped sharply on a number of occasions, such as following the attack on New York’s Twin Towers in 2001 and recently during the COVID lockdowns in 2020 when it fell to an 18-year low of 0.55 US cents.
It appreciated against the US dollar in the decade up to 2011, largely driven by Australia’s mining boom, increasing from below US$0.50 in 2001, reaching parity in 2010, and then a peak of over $1.10 in 2011.
(Related: How To Buy Bonds In Australia).
After starting 2023 around the US$0.68c range, the Australian dollar weakened throughout the year, primarily because both local and global economic conditions were not positive, and our currency is risk-sensitive.
Did you Know?
When markets fear a global recession, investors shy away from the Australian Dollar in favour of the US Dollar, a "safe haven". This reduces the demand for the AUD on the foreign exchange markets, weakening its exchange rates.
Will The Australian Dollar Exchange Rate Strengthen In 2024?
Broadly, the predictions point to a rising AUD relative to the USD, but it's yet to be seen if this optimism is warranted.
The interest rate differential story holds promise, but US cuts may be modest. Former US Secretary of the Treasury Larry H. Summers said while easing was the obvious move:
AMP’s chief economist Dr Shane Oliver said in May that a Trump victory at the US polls in November could intensify trade wars—particularly with China—that make the Australian economy vulnerable.
How other advanced economies perform and manage their monetary policies will be a key influence on the Aussie’s value.
If risk sentiment improves, if the US Federal Reserve lowers rates rapidly, and if the RBA maintains its wariness, the outlook for a strengthening AUD is more favourable.
Jody
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.