The Australian dollar lost ground throughout 2023. After a brief surge to over 71 US cents at the start of the year, the AUD weakened and was valued at around 64-65 US cents throughout the second half of 2023.
The AUD/USD rallied to over 68c in December 2023, but is currently trading at 65c at the time of writing 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.
Let’s explore the factors to watch and whether recovery is imminent.
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.
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 January 22 predicted the AUD would be worth 0.68 US cents by June 2024.
- NAB’s FX forecast as of late January was that the AUD/USD exchange rate would reach 0.71c by June 2024.
- ING is bullish on a rising AUD, forecasting an exchange rate of US$0.67 by the second quarter of 2024.
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).
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 0.70c by the end of 2024.
- NAB puts the AUD/USD at 0.73c by December ’24.
- ING thinks we’ll see the Australian dollar lift to US$0.71 by December 2024.
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).
|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).
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).
- Labour market figures.
- Consumer spending data.
Above: Slowing inflation bolsters the case for interest rate cuts in 2024.
Inflation is particularly important because 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 is likely to decline.
Some believe Australia will experience a continuing economic slowdown in financial year ’24, but probably not a deep or lasting recession.
Fiscal policy, such as the recalibrated stage-three tax cuts, could also stimulate the economy.
Inflation remains high but is slowing: recent wage growth figures were strong but still not on par with inflation.
With evidence that higher rates were returning supply and demand to a sustainable balance, the RBA held rates in February 2024, after doing the same back in December 2023.
2. RBA’s And Fed’s Interest Rates.
The RBA cash rate currently sits at 4.35%, and the US Fed’s remains at a 22-year high of 5.5% after it decides to hold rates following its January meeting.
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: An anticipated cutting cycle from the Fed in 2024 helped US stock markets finish 2023 higher. Goldman Sachs forecast five cuts in 2024 starting from March.
- Pessimistic view: It’s still unclear if inflation has cooled enough to prompt the extent of rate cutting predicted. The Fed pencilled in three cuts for 2024 at its last meeting.
Generally, signs point to policy easing in the US considerably ahead of a similar move by Australia’s central bank (which isn’t expected to cut till late 2024) — meaning investors will start to find Australian assets more attractive.
(Related: Best Share Trading Platforms In Australia).
According to Westpac’s Chief Economist Luci Ellis, pushing up the exchange rate 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.
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 and retail sales increases, which lifted 4.6% and 7.6% (above expectations of 4.4% and 7.0%).
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.
Not only does a poorly performing Chinese economy reduce demand for the Aussie, it can encourage capital flows to the US, further strengthening the greenback.
4. Terms Of Trade And Commodity Prices.
An increased demand for Aussie goods 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.
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.
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.
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 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 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 AUD and favour the USD, a “safe haven”. This reduces the demand for the Australian dollar and weakens 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.
How other major economies perform and manage their monetary policies will be a key influence on the Aussie’s value.
As ING’s AUD/USD 2024 outlook stated: