Published: January 22nd, 2025
The Australian Dollar is shaping-up to be the number two-performing G10 major for the year to date, benefiting from more upbeat global economic outlook and strong signals of domestic growth. AUD’s 2025 outperformance is happening amid a bullish shift in investor sentiment, stable commodities demand from China, and continuing economic strength Down Under.
An improving domestic picture solidified on Thursday, January 16th, when a recent jobs print found employment had risen by 56.2k in December, up from the 28.1K jobs added in November. Altogether it overshot the consensus forecast, which was looking for another 15K new jobs.
A research note from the Commonwealth Bank of Australia (CBA) said the surprise figure had reduced the odds of a February interest rate cut by the Reserve Bank of Australia (RBA). A ‘temporary lift in the Australian-US Dollar exchange rate to 0.6250 after the employment report surprised to the upside,’ CBA analysts wrote.
The AUD/USD has been steadily ticking up for the last three days and was trading at 0.63 at time of writing, affirming its hold on gain status for the YTD. AUD’s rise is notable as most G10 majors are down against the resurgent US Dollar.
In fact the Aussie was up against all peers at time of writing, with the Pound to Australian Dollar exchange rate dropping to 1.9652 from 2.01 on January 2nd. The Euro to Australian Dollar rate has also dropped, falling from 1.6751 to 1.6561 for the YTD.
At a three-month average rise of 2.7 per cent, year-on-year, Australia’s employment growth remains unchanged from three months ago, and is only just under the three per cent growth rate seen in December 2023.
Labor market strength suggests wages will rise. RBA policymakers will use that assumption and factor in to forecasts about likely domestic inflation.
In October 2024, a note to investors from Danske Bank advised its forex clients to sell Australian Dollars, pointing to a US soft landing as the rationale.
A soft landing in this context meant bank analysts believed the Federal Reserve had successfully brought down inflation while sidestepping a significant economic downturn.
Moves by the US Fed can influence AUD’s value, as it's considered a 'high beta' currency that tends to exceed its G10 peers when the Greenback is under pressure and stock markets are on the up.
Danske thought AUD could become a way to profit from the view that the recent decline in USD was over, and that the broader market rally was coming to an end.
Analysts wrote that the Fed's easing cycle is 'currently priced to perfection,’ adding that any additional weakness in global growth indicators ‘might begin to weigh on cyclical currencies like AUD.
The Aussie faced another risk had the American economy turned out to be more resilient than expected. This would have raised the threshold markets had priced in as the timepoint where the Fed will end its interest rate-cutting cycle. That would put wind at the Dollar’s back and also weigh on the Down Under fiat.
‘In our view the risk-reward of shorting AUD/USD is attractive following the most recent rally.’
The looming impact of events in China dint seem to factor into Danske’s position, not even speculation that Beijing was set to inject significant monetary and fiscal stimulus. As a prime destination for Australia's commodity exports, this would normally be expected to have a notable impact on AUD’s value.
In August 2024, an analysis by Dutch investment giant Rabobank suggested that policy actions by the Reserve Bank of Australia (RBA) would likely extend what had been a recent show of strength for AUD.
The bank brought its forecast targets for the Aussie forward on expectations that the RBA would raise interest rates twice this year, first in August and then later in November, as it fought to cool persistent inflation.
"Recent economic prints have firmed up our expectations for more rate hikes in this cycle," said Rabobank in a note to investors. The analysis notes that retail sales growth in May was 0.6 per cent month-over-month, pointing to strong consumer demand.
The yearly pace of CPI inflation, meanwhile, fell back to 3.5 per cent from the 4.2 per cent seen in the first quarter. This was ahead of consensus, which anticipated an easing to 3.6 per cent.
The trimmed mean, a closely watched measure of core inflation, rose one per cent in Q1 2024, beating the consensus forecast of 0.8 per cent. The yearly pace fell back to 4 per cent, from 4.2 per cent.
A decision by Canberra to lower taxes for all 13.6 million Australian taxpayers from July 1st was not expected to reduce inflation, rather raising the potential for increased consumer demand. The RBA said the economic impact of the tax cut brought an element of uncertainty.
Any additional RBA interest rate hikes would have placed it out of sync with other major central banks. Rabobank believed the interest rate differential would be supportive of AUD.
In early June 2024, analysts were predicting that a nudge from the RBA would lift AUD to highs last seen a year earlier in June 2023. Analysts were betting that central bankers in Sydney would raise rates again to cool inflation, though a downward turn in global investor sentiment would eventually scuttle significant AUD gains.
Analysts believed inflation was rising based on an earlier print which came in above consensus at 3.6 per cent year-on-year. For AUD bulls, those figures offered support.
An analysis by Westpac said the central bank would play Hamlet in June. ‘To hike or not to hike? That is the question for RBA policymakers after a hotter-than-expected set of inflation figures arrived on Monday. AUD bulls are now straining to hear the answer.’
Westpac believed another rate rise will act as a trigger for forex traders closely observing AUD and NZD.
