Last updated: July 4th, 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 rallied following surprising inflation data for May, which came in higher than expected.
Let’s explore the factors to watch and whether the rally will continue.
| Key Takeaways: |
|---|
| The outlook in 2024 is for a strengthening Australian dollar against the US dollar, bolstered by May’s unexpected 4% CPI figure. |
| 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.
Barring any major catalysts, the general outlook for the AUD/USD exchange rate in 2024 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.
- NAB’s FX forecast as of June was that the AUD/USD exchange rate would reach 0.69c by December 2024.
- ING is forecasting the exchange rate will remain steady at US$0.66 by Q4 2024.
In March, financial markets were factoring in the Reserve Bank of Australia’s (RBA) 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 March quarter CPI figures that reveal Australia’s inflation isn’t slowing as quickly as expected.
In April-May, Australian money markets priced in higher expectations of a cash rate rise, and the implied yield from cash rate futures showed investors didn’t expect a cut till 2025.
Since then:
- The US Federal Reserve held rates in June and indicated it would still consider cutting rates later this year, despite only “modest further progress” towards its 2% inflation target.
- Australia’s central bank also held its rate at 4.35% in June — and delivered a statement that hints at a restrictive stance.
- The monthly CPI spiked to 4% YoY in May, fuelling expectations of an RBA rate hike in August.
The RBA Board described inflation as persistently high and was “resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
In a subsequent press conference, RBA Governor Michelle Bullock admitted the Board considered a rate hike, but didn’t discuss a cut.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
Depending on how the Fed moves, the growing divergence with US policy could bolster demand for the Aussie dollar.
ING FX strategist Francesco Pesole said the Aussie dollar was the best performer in the G10 currencies on June 18 following the hawkish hold.
Above: Historical snapshot of bilateral and Trade-Weighted Index (TWI) AUD/USD exchange rates. Note that the TWI is more stable (see below for explanation).
Short-term, Pesole said ING sees a potential lift in the AUD/USD to 0.68 before US election risks weigh on China-exposed currencies later this year.
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 0.69c by June 2025.
- NAB puts the AUD/USD higher at 0.72c by June ’25.
- ING thinks the Australian dollar will be stuck at US$0.66 until mid-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 more 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 a 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 continued to hold at its most recent meeting in June, stating “the pace of decline [in inflation] has slowed.”
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 June 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: Four consecutive months of US inflation rises (from January to April 2024) raised fears of a hawkish move by the Fed. However, in June, Jerome Powell said that while the Fed hadn’t eliminated the possibility of hikes, it felt its policy was restrictive and that cuts were merely delayed.
- Pessimistic view: If inflation doesn’t bolster the Fed’s confidence that inflation is sustainably falling and the labor market remains strong, Powell said not cutting was on the table. “We’ll need to see more good data,” he said.
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, 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 recent results showing higher-than-expected industrial production, which grew 7.0% year-on-year, above expectations.
Also positive, China’s factory activity is picking up, expanding for the first time in six months.
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.
A June market outlook report from Commbank said recent Chinese property-related announcements 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.
(Related: Best Share Trading Platforms In Australia).
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:
- 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 are significantly disrupting international trade and fuelling ongoing concern about oil prices, which could increase inflationary pressure.
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.
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 and the US Federal Reserve lowers rates before the RBA, 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.