Australian Dollar Forecasts Cut at Commonwealth Bank of Australia

The Australian dollar's recovery against the US dollar is likely to be shallower than previously expected, according to new downgraded forecasts from the Commonwealth Bank of Australia, owing to persistently wide interest rate differentials.

"We expect AUD/USD to trade in a range in the next few months before increasing in the second half of 2024 and into 2025," Commonwealth Bank of Australia strategists said in a Wednesday forecast review.

"Overall, we consider AUD/USD can lift modestly rather than strongly over the next year. One obstacle to large gains in AUD/USD is the large negative interest rate differential between Australia and the US," they added.

The two-year Australia-US bond yield differential has been negative since 2017 and widened more than one percent in favor of the US dollar by the middle of April after financial markets whittled down the number of expected Federal Reserve interest rate cuts to around two, from as many as six back in January.

The delayed timing and reduced scale of the Fed's easing cycle is now likely to keep the rate differential at similarly wide levels until late in the year, CBA strategists said. Their forecasts indicate the Fed is unlikely to cut rates before November and that it will only cut twice in total this year, while the Reserve Bank of Australia is expected to cut just once in November.

"We still expect the USD to track lower later this year. Implied volatility in a range of markets remains low," CBA strategists said

"Low volatility weighs on the USD because it is a safe-haven currency. Volatility is likely to remain low if the advanced economies recover as we expect," they added.

CBA cut its forecasts for AUD/USD to 0.65, 0.67 and 0.69 in June, September and December respectively on Wednesday, from 0.66, 0.69 and 0.71 previously. Meanwhile, the US Dollar Index is seen falling to 105.0, 103.3 and 101.5 in June, September and December respectively, from 102.9, 100.9 and 99.5 previously.