(Bloomberg) -- The Australian dollar may be headed for its first annual gain since 2020, as the central bank keeps interest rates high and the economy benefits from expected Chinese stimulus.
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The Aussie will climb as high as 68 cents by December, according to Westpac Banking Corp. and $Bank of America Corp(BAC-N)$., which would imply a gain of 8.4% from Friday’s close. National Australia Bank Ltd. and Westpac see the currency rising to 65 cents by the end of June, after some initial volatility.
The Reserve Bank of Australia’s reluctance to enter an easing cycle has helped support the Aussie, and investors are awaiting inflation data due this week to gauge if the cautious approach has been vindicated. The currency’s appeal has also gotten a boost as China — Australia’s largest trading partner — pledges to counter US levies by stimulating domestic spending.
All this is happening as market watchers are warning that President Donald Trump’s aggressive trade policy will hurt US economic growth and weaken the dollar.
“We see a gradual recovery in the Australian dollar from the second quarter onward, propelled first by dollar depreciation followed by the lagged impact of China stimulus in the second half of 2025,” said Oliver Levingston, a strategist at Bank of America in Sydney. A higher RBA terminal policy rate - driven by sticky inflation - will also support a medium-term trough in Aussie, he added.
Economists forecast that the central bank will stand pat next month after lowering borrowing costs for the first time in four years in February. Policymakers have expressed caution about further easing as they want to see further evidence that inflation is under control.
“We think that terminal rate pricing is too low,” said Andrew Ticehurst, a senior strategist at Nomura Holdings Inc. in Sydney, who sees the Aussie strengthening to 64 cents in the second quarter on a weaker greenback. Australia’s currency is “trading a little below ‘fair value’ based on historic relationships with commodity prices and rate spreads.”
The Aussie has risen 1.3% this year after declining almost 10% in 2024. Hedge funds have slashed their bearish wagers on the currency since January after they were the most short in a decade, according to data from the Commodity Futures Trading Commission.
To be sure, the Aussie is likely to remain volatile as the April deadline on Trump’s reciprocal trade tariffs looms. Westpac warns that the currency pair may fall below 62 cents as risk positions are flushed out, before a rebound takes place. Australia has been refused an exemption from steel and aluminum duties despite intense lobbying and there are fears major exports to the US may be affected in the next round.
These trade policies, however, and US aggression toward its allies has investors worried about a weakening in the economy, which would undermine the dollar. The world’s reserve currency has declined 3% this year as markets solidify expectations of Federal Reserve easing and a ramp-up in spending in Europe undercuts the trend of US exceptionalism.
“A significant regime shift against the US dollar is upon us,” said Richard Franulovich, head of currency strategy at Westpac. “That opens the door open to a sustained bullish range reset for Australian dollar.”
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