For Traders from Club iNSIDER: Australian Dollar vs. US Dollar: Does AUD Remain Historically Cheap?

1. Australian Dollar Forecast: Mixed Outlook

The Australian dollar may be supported by favorable seasonal factors over the next few weeks, but the outlook for early 2025 is uncertain at best. This comes after a short-lived, internally motivated uptrend at the start of the second half of the year, followed by a 7.2% decline from the summer peak above 0.69, when factors such as a strengthening dollar, Trump’s tariff policy and cyclical issues related to China resurfaced.

Short-term external factors – particularly those related to trade policy – ​​could weigh on the currency again early next year. While the RBA is likely to maintain its dovish stance on December 10, monetary easing is not expected until 2025 at the earliest, meaning that AUD bulls cannot count on the central bank for long. In early 2025, bullish traders may turn to CNY, while a range of 0.66–0.61 for the AUD-USD exchange rate would be a good exit for the Australian currency.

2. Short-term catalysts for the AUD’s rise have changed again

The short-term drivers of the AUD changed again in the fourth quarter and look set to continue to influence early 2025. with the change of administration in the US and the associated risk of tariff policy, as well as heightened concerns about China, reviving the internationally motivated bearish scenario.

Australian dollar bulls cannot count on the RBA continuing its wait-and-see approach from this summer and better growth differentials are unlikely to emerge until later in 2025. These factors paint a mixed picture for the Australian currency in early 2025.
Structural factors – through fiscal and current positions – are mixed and largely irrelevant at this point. The attractiveness of the Australian dollar’s ​​valuation and historical prices may become more significant at some point next year, but bulls need to take the initiative first.

3. Narrowing growth divergence could eventually support a bullish scenario

The RBA’s rate cut could boost consumption in 2025, and China’s improved economic momentum could boost Australia’s growth prospects through export channels, but the risk of trade restrictions cannot be ignored. The economy was stronger than previously expected in 2024, but growth was largely driven by temporary or one-off factors such as Taylor Swift concerts, increased public defense spending and strong population growth.

Meanwhile, higher interest rates over a longer period, more persistent than expected inflation and its impact on real disposable incomes and consumer confidence have restrained household consumption.

According to Bloomberg consensus, Australian GDP is expected to grow by 1.2% annually in 2024, down from 2.1% in 2023. For 2025 and 2026 are forecast at 2% and 2.5% respectively, with the narrowing of the growth gap with the US economy potentially supporting Australian dollar optimists.

4. Uncertain outlook for yield growth in 2025.

The RBA – along with Norges Bank – is the only central bank in the G10 that has not yet started easing monetary policy. This was positive for the Australian dollar in 2024, but may not be the case in 2025. A wait-and-see decision at 4.35% is expected at the RBA meeting on December 10, but Bloomberg Economics expects a cumulative easing of 100 basis points next year, suggesting that the case for rising yields will be much less favorable to Australian currency optimists than it has been this year. However, if this is coupled with positive adjustments in real growth expectations at a time when the Fed also continues to ease policy, the downward impact on the AUD-USD exchange rate could be limited. The two-year Australian-US bond yield spread is trading around minus 28 basis points, compared with plus 9 at the end of September, while the Australian dollar has lost more than 7% for the same period.

5. Australian dollar dominance over the yuan possible by 2025.

Australia’s close economic ties with China mean the Australian dollar has historically been a good proxy for sentiment towards that country. The structurally weaker yuan over the past few years is likely to persist, and this contributes to our Australian dollar outlook, regardless of domestic factors. The potential trade agenda of the new US administration leaves the Chinese economy and the yuan vulnerable early next year, which does not help the Australian dollar, despite potentially more supportive domestic growth dynamics.

An alternative could be to consider the possibility of dominating the Australian dollar against the yuan, avoiding exposure to the Australian dollar-dollar exchange rate.

The yuan has lost about 2.25% against the US dollar since its January peak, while the Australian dollar has fallen 5.7% since its January rise above 0.68.

6. Commodities and confirmed market risk: Additional considerations

Commodity prices, especially iron ore (about 25% of Australia’s exports), are strongly linked to the fortunes of the Australian dollar. Questions surrounding China’s economy this year have limited optimism for the currency in the medium term and are likely to continue to do so. Beyond commodities, confirmed risk-on sentiment (such as continued equity market gains) could theoretically support a sustained rise in the Australian dollar. In practice, however, the correlations between different asset classes in 2024 have been highly questionable. As of December 5, the S&P 500 is up about 27.5% year-to-date, the CSI 300 is up 11.81%, while the Australian dollar has gained a meager 5.5% against the US dollar.

7. Valuation and history support: Opportunity for interest

Short-term factors are somewhat mixed for 2025, but long-term ones such as valuation and history remain strongly supportive and could attract more attention if market sentiment improves. Positioning is also favorable, with both asset managers and leveraged funds underweight, although not as extreme as at the start of the year.

8. Australian Dollar Remains Undervalued and Historically Cheap

The Australian dollar is undervalued against the US dollar according to several models, including our latest BEER data (with inputs as of the end of Q1), which puts the Australian dollar almost 13% above its current level of 0.6441. Other indicators that are arguably more relevant, such as longer-term MAs, also support the Aussie bulls.
On a historical basis, Australian dollar supporters make a compelling case against several G10 currencies, including the dollar.
The Australian dollar is historically cheap. Even after a nearly 9% rise from its 2020 low of around 58 cents, it is trading about 41% below its 2011 peak of around $1.102. It is currently almost 11% below its 10-year average of about 72 cents against the US currency and 4.5% below its level against the Canadian dollar (near C94.5 cents).

9. Structural Drivers: Mixed and largely irrelevant

Structural factors appear mixed to supportive for the Australian dollar, but we do not expect fiscal or external positions to be significant drivers. Australia was not spared the Covid-related global recession, and the strict management of the pandemic led to a sharp deterioration in public finances in 2020–21. The situation has improved significantly since then, with small budget deficits in 2023 and 2024, while rising revenues have strengthened the country’s fiscal position. According to the IMF, the debt-to-GDP ratio is expected to reach 49.33% in 2024.

The external position was negative in 2023. and is likely to show a small deficit again in 2024.
According to Bloomberg consensus, Australia’s budget deficit to GDP will be 0.4% this year and 1% in 2025, while the current account deficit to GDP is expected to be 1% this year and 0.6% in 2025.

10. Australian Dollar Positioning: Marginal Help for Bullish Traders

Leveraged fund positioning shifted from underweight to overweight over the summer, but has returned to underweight in line with spot price dynamics in recent months, the latest CFTC data shows. Asset managers, which better capture medium-term sentiment, also remain underweight to the Australian dollar, but have significantly reduced their exposure. This leaves room for further appreciation in the currency if long-term investors adjust to a more positive outlook for Australia, close short positions or decide to increase their allocations.
As of November 26, leveraged fund contracts were minus 2,898 compared to minus 5,122 on January 5; assets under management were minus 11,115 compared to minus 42,658 on January 5. Leveraged funds were minus 8,479 and assets under management were minus 16,888 on January 6, 2023.

11. The scoreboard combines the factors influencing the currency

The scoreboard is a snapshot of how we see the impact of various factors at a given time. We distinguish between short-term (typically cyclical or political), medium-term (fiscal and external positions), and long-term (including valuation considerations and the importance of currency in reserve allocation decisions). We also look at positioning and consensus, as these can be key market drivers, especially when identifying potential trend changes.
The time frame is highly subjective and subject to change, but for now, short-term factors range from intraday to one-year periods, medium-term from one to three years, and long-term from three years or more.