Rabobank’s Senior FX Strategist Jane Foley reports that the Australian Dollar (AUD) is currently under pressure, ranking as the weakest G10 currency on a one-day basis and the third weakest over five days, following the Japanese Yen and US Dollar [1]. Despite this, Rabobank maintains its expectation for one more Reserve Bank of Australia (RBA) rate hike this year, although market pricing reflects only 12 basis points of hikes over the next three months, indicating skepticism among investors [1].
Foley attributes the AUD’s weakness to several factors, including subdued Chinese demand for Australian commodities, energy-related trade shocks, and a softer domestic economic environment [1]. She also notes that safe haven flows into the US Dollar, particularly if the Iran war escalates, could push AUD/USD back toward the 0.70 level in the near term [1].
Nevertheless, Rabobank sees potential for a shallow uptrend in AUD/USD into next year, supported by the risk of a November RBA rate hike and the bank’s view that the US Federal Reserve will refrain from further tightening this year [1]. The recent reduction in Fed rate hike expectations has diminished the US Dollar’s appeal, which could offer some support to the AUD/USD pair [1].
Foley also highlights that Australia’s current account has moved into deficit due to the country’s significant net foreign liability position. While a current account deficit does not always equate to a weaker currency, it can increase vulnerability during periods of broad market uncertainty [1].
CONCLUSION
Rabobank expects the Australian Dollar to experience a shallow uptrend into next year, despite current headwinds and market skepticism about further RBA rate hikes. The outlook is tempered by external risks and Australia’s current account deficit, but diminished US Dollar strength may provide some support to the AUD.