S& P 500 hits all time highs U.S.-Japan trade deal optimism
Bank of America (BofA) analysts provided insights into the Australian dollar’s (AUD) recent performance amidst global tariff concerns, particularly those related to China. The AUD has demonstrated heightened sensitivity to tariff news, momentarily dipping to post-Covid lows against the US dollar (USD) and its trade-weighted index.
Despite aligning with BofA’s bearish outlook for the first quarter of 2023, the currency has approached what the firm anticipates as its lowest forecasted point at 0.62.
BofA maintains its forecast but advises that it is premature to disregard the tariff risk premium. The United States’ tariff measures have primarily targeted countries other than China, which has helped limit the depreciation of the Chinese yuan (CNY). However, there is a downside risk that could affect the AUD.
Additionally, expectations of inflation have prompted BofA economists to predict earlier rate cuts by the Reserve Bank of Australia (RBA), reducing the previous advantage of rate differentials in favor of the AUD.
Despite these challenges, BofA anticipates a gradual recovery for the AUD starting in the second quarter, driven initially by a weakening USD and subsequently by the delayed effects of China’s economic stimulus in the latter half of 2025. The firm’s revised forecast includes a higher terminal policy rate for the RBA at 3.6%, based on persistent inflation, which supports a medium-term stabilization for the AUD.
BofA expresses particular optimism for the AUD’s performance against the Japanese yen (JPY) and the Swiss franc (CHF), projecting over a 15% upside by the end of the year.
Current market positioning indicates some near-term risks for the AUD, as the market remains predominantly long on the currency. This stance is attributed to hedge funds, which BofA views as having an overstretched position, and options positioning.
Compared to the end of the third quarter, long positions in AUD have decreased due to actions by real money players and through futures contracts.
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