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The Australian dollar is tipped to recover against the U.S. dollar by Standard Chartered, which says Australia's interest rate advantage will outlast further Federal Reserve hikes, provided global risk appetite improves.
Standard Chartered says the Australian dollar's slide to a six-month low against the U.S. dollar last week is a chance to buy, with the currency set to recover gradually into 2027.
"We remain bullish on AUD/USD and would add on pullbacks," says the London-headquartered bank in a recent update.
Australia's interest rate advantage is the foundation of the call, bolstered by the Reserve Bank of Australia's cash rate sitting at 4.85% following the hike on 3 November.
"Even after the two 25bps Fed hikes we expect by mid-2027, Australia would retain a 35bps rate advantage over the top of the Fed's target range, supporting a gradual AUD recovery," Standard Chartered adds.
Why does a rate advantage matter for a currency? Investors earn more on Australian dollar deposits and bonds than on their U.S. equivalents, which draws capital into the Australian dollar and supports its value.
The Australian dollar has lagged, says Standard Chartered, because markets had largely priced the November hike and the RBA "gave investors less reason to expect another."
Markets have since scaled back the odds of the cash rate reaching 5.10% next year to around 30%, as the RBA signalled its hiking cycle is near its end.
Standard Chartered reads the decision as less dovish than the six-to-three vote suggested, noting that Governor Michele Bullock said the RBA is "preserving our options."
The Australian dollar is also sensitive to swings in global risk appetite, and the sell-off in U.S. technology stocks weighed on it as it spread to global equities and triggered margin calls, says Standard Chartered.
The bank sees upside for the Australian dollar "on a sustained recovery in risk sentiment."
Standard Chartered Forecasts AUD/USD Recovering Towards 0.74
The Australian dollar-to-U.S. dollar exchange rate trades at 0.6915, and Standard Chartered's targets put it about 4% higher in three months and 7% higher in a year:
1. AUD/USD three-month target: 0.72
2. AUD/USD 12-month target: 0.74
The same forecasts point lower for the pound-to-Australian dollar exchange rate, as Standard Chartered expects less from sterling.
"With markets pricing only around 50bps of additional BoE tightening over the next 12 months, we see the GBP remaining vulnerable," says the bank.
Standard Chartered's GBP/USD forecasts of 1.33 at three months and 1.35 at 12 months, published in late October, imply GBP/AUD at around 1.8470 and 1.8240 respectively, against spot at 1.9421.
That would leave GBP/AUD around 5% lower in three months.
Analysts Split on How Far the Recovery Can Run
Westpac also forecasts AUD/USD at 0.72 in three months, and Lloyds says it would treat lower AUD/USD levels as an opportunity, citing yield, commodity prices and a cheap valuation.
However, UOB forecasts AUD/USD at 0.67 in a year on the view that the Federal Reserve will keep raising rates. "Rate differentials remain the primary driver of our USD outlook," says the Singapore-based bank.
Bank of America forecasts 0.68 in 12 months, and its model of trend-following funds points to further Australian dollar selling this week.
The first test comes from U.S. inflation figures due at 13:30 London time on Tuesday, with Commonwealth Bank of Australia expecting AUD/USD "to be weighed down this week by another strong US CPI."
The Australian dollar's recovery towards Standard Chartered's targets depends on a sustained revival in risk appetite, and a strong U.S. inflation print would delay its start.
