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AUD Outlook in Q2

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 



The Australian dollar (AUD) holds a pivotal role in the global currency market, primarily as a commodity currency. Australia’s position as a major exporter of commodities deeply ties the value of the AUD to global commodity prices.


Consequently, fluctuations in commodity markets often reflect on the AUD’s performance, making it a key barometer for commodity trends worldwide.


Furthermore, the AUD provides diversification benefits to global investors due to its relatively low correlation with other major currencies such as the US dollar, Euro, and Japanese Yen. This would contribute to demand for the currency as part of diversification strategies.  


Overall, the Australian Dollar’s multifaceted roles in commodity trading, regional commerce, and portfolio diversification cement its importance in the global currency market.  



Australian Dollar Q2 outlook  


The Australian Dollar has faced a challenging period in recent years compared to its stronger counterpart, the US Dollar. Unfortunately, this trend of weakness seems to have persisted into 2024. However, there may be some positive developments on the horizon for supporters of the AUD, albeit largely driven by perceived weaknesses in the USD rather than any significant improvements in the Australian economy.  


Contributing factors such as increasing US interest rates, the USD’s status as a safe haven currency, and overall risk aversion in the market have all contributed to the AUD’s struggles. Despite the Australian economy performing relatively well compared to some Western peers during challenging times, this hasn’t been effectively reflected in the AUD/USD exchange rate.  


As we enter a new quarter, the US Federal Reserve remains confident in its plans to lower interest rates this year. This stance has weighed on the USD predictably, leading to a slight improvement in sentiment towards riskier, growth-linked assets like the Australian Dollar. Although Australian borrowing costs remain high, with potential for future rate cuts, the Reserve Bank of Australia (RBA) is hesitant to act until it’s more certain that inflation will return to its target range. While recent Australian inflation figures have decreased from their peak in 2022, they still exceed the RBA’s target range. Therefore, the prospect of lower US rates combined with stable Australian rates is likely to offer some support to the Australian Dollar. Additionally, there are indications of improving relations between Australia and its major trading partner, China. However, tensions may persist due to Australia’s involvement in the controversial ‘AUKUS’ defense arrangement with the US and Britain, which is viewed unfavourably by China.  


Overall, the potential for a weaker US Dollar, and a less risk-averse market environment should provide support for the AUD in the near term. However, the full impact may not be felt until later in the year when the expected Fed rate cuts materialize.  



AUD/USD rises amid Fed rate cuts speculations  


On Wednesday 03 April 2024, the Australian Dollar demonstrated robust performance against its US counterpart, buoyed by several factors influencing market sentiment. Primarily, the AUD’s ascent was propelled by a decline in US Treasury yields alongside a noticeable weakening of the USD, which provided a favourable backdrop for the Australian currency’s appreciation. Notable, Federal Reserve policymakers, including Fed Chair Jerome Powell and Atlanta Fed President Raphael Bostic, made significant statements regarding the possibility of future rate cuts, further supporting the AUD’s upward trajectory. Powel reiterated the Fed’s readiness to adjust rates, albeit with a cautious approach dependent on incoming economic data, while Bostic’s endorsement of a potential rate cut in the latter part of 2024 garnered significant market attention.  


Furthermore, Adriana Kugler, a recent addition to the Fed’s Board of Governors, added weight to the dovish sentiment by highlighting the ongoing disinflationary pressures, suggesting that this could warrant multiple rate cuts by the end of the year. Such commentary contributed to bolstering investor confidence in the AUD.  



AUD/USD mixed data  


Despite the Australian Dollar’s strength, the AUD/USD pair faced mixed signals from US economic data released during the session. While the March ADP report revealed a robust increase in private hiring, surpassing estimates with an addition of 184K jobs, softer-than-expected PMI data from both S&P Global and ISM Services provided a contrast. Nevertheless, the AUD managed to maintain its upward momentum.  


Meanwhile, on the Aussie front, the Judo Bank Services PMI for March showcased a notable improvement from 53.50 in February to 54.4. signalling ongoing expansion in the services sector. Highlighting this positive development, the report noted that this marked the fourth consecutive month of improvement, with the services output index witnessing a significant gain of 8.4 points, reflecting substantial progress in recovering efforts following pandemic-induced lockdowns.  


While many Australian banks anticipate the AUD/USD to continue its upward trajectory by the end of 2024, there are notable risks to this outlook. The timeline for US rate reductions may end up being longer than anticipated, and geopolitical conflicts such as those in Ukraine or Gaza could dampen market sentiments unexpectedly. Additionally, the AUD/USD remains in a long-term downtrend since early 2021, suggesting that any potential rises this year may not reverse the trend entirely. 

 

 

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