Published: March 19th, 2025
A new report from Commerzbank Research predicts the Australian Dollar (AUD) is headed for weakness in the second quarter thanks to a ‘meaningful’ new rate cutting cycle from the Reserve Bank of Australia (RBA).
The RBA recently lowered its cash rate for the first time in the current cycle, ending the central bank's most elongated rate hike cycle in the past 30 years.
The bank's decision to cut rates comes after 33 months of progressive tightening, averaging to a cumulative rise of 4.24 per cent. Regardless of steady hikes, however, Commerzbank analysts noted that the peak interest rate has remained at its lowest point in three decades.
While AUD has risen marginally against the Greenback in recent weeks, bank analysts say this is mainly down to USD weakness rather than a sustainable showing of AUD strength. Against most of its G10 peers, the Aussie has been in decline.
Commerzbank thinks more downside is coming, with AUD/USD poised for a drop to 0.60 by the end of this year, falling further to 0.58 by late next year. Analysts have concluded that the RBA will keep cutting rates ahead of market expectations, hitting a projected cash rate of 3.5 per cent by the end of the third quarter.
‘In February, RBA policymakers said that investors should be wary of assuming that a first cut would necessarily be followed by additional reductions,’ the report says. ‘Given ongoing weakness in business sentiment and indications of lowering levels of consumer confidence, we expect to see accelerated moves.’
A note to investors from Danske Bank in October 2024 advised forex traders to sell their Australian Dollars, pointing to a US soft landing as the rationale.
The Nordic bank's analysts believed America's Federal Reserve has successfully brought down inflation while sidestepping a significant US economic downturn.
Fed moves can influence AUD's value as it's considered a ‘high beta’ currency, meaning it tends to exceed its G10 peers when the Greenback is under pressure and stock markets are rising.
Danske believed AUD would become a path to profit from the view that the recent decline in USD is 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 if the American economy had turned out to be more resilient than expected. This would have raised the threshold markets had priced in as the point where the Fed will end its interest rate-cutting cycle. That would have 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.’
Looming events in China didn't 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.
But Danske analysts weren't convinced. ‘We doubt that any economic stimulus package will be enough to mitigate the Chinese economy's structural challenges.’
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, beating the consensus forecast of 0.8 per cent. The yearly pace fell back to 4 per cent, from 4.2 per cent.
A recent 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 has said the economic impact of the tax cut brings an element of uncertainty.
Any additional RBA interest rate hikes this year would place it out of sync with other major central banks. Rabobank believes 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.
Australian CPI rose unexpectedly to 3.6 per cent in April (YoY), its highest level for six months. Economists were looking for a decline to 3.4 per cent.
