1. Renewed expectations of RBA cuts

Weak Q3 growth figures for Australia revived bets of RBA cuts in 2025. The RBA cash rate futures curve has fully priced in 25bp to land in April, June and November. The anticipated -75bp of cuts would then see the RBA’s cash rate lowered from 4.35% to 3.6%. Incoming data for January will likely decide whether markets will bring forward that first cut to Q1, most notable of which will be the quarterly CPI figures in late January followed by incoming employment figures.

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For RBA doves to stand any chance of being proven right, incoming data in Q4 needs to deteriorate. And quickly. RBA cash rate futures have fully priced in four 25bp cuts by August, the first of which is assumed to be in February (their RBA’s first meeting of the year).

Source: RBA

2. Fewer cuts expected from the Fed

The Federal reserve have been in an easing cycle in 2024, yet they announced their pace of easing will slow significantly in 2025. They also upwardly revised their outlook for growth and inflation to justify the slower pace of easing. While the Fed still expect their interest rate to be below the RBA’s at the end of 2026, the differential has shrunk to a mere -10 basis points (bp), down from -60bp. And it is the narrowing of this spread which helps partially explain why AUD/USD plunged to a 2-year low after the Fed’s December meeting.

Source: Eikon

3. Trump, tariffs and China

Interest rate differentials are a key driver, but we also need to factor in the threat of Trump’s tariffs and how they tie in with China and their impact on the Australian economy. The previous Trump administration did not directly impose tariffs on Australian exports, and there’s no immediate threat of the new Trump administration doing so this time around. But any actions against China can indirectly hurt Australia.

Trump has already been playing hardball with Canada, Mexico and China with threats of high tariffs on their exports. Beijing is already letting the yuan slide to offset said tariffs via boosted exports. That tends to see their Asian trade partners follow suit amid a ‘race to the bottom’, and AUD/USD tends to get dragged lower for the ride. In recent months, we have seen a very high correlation between a weaker yuan and a weaker Australian dollar. Add into the mix a strong US economy and US dollar, it is not looking too great for AUD/USD bulls next year. At least initially.

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As a weaker currency is inherently inflationary (via higher import costs), there will surely come a point where a weak Australian dollar becomes a political talking point and the RBA may become less dovish to support the currency. We may not be there yet, but the topic becomes more important the lower the currency falls.

Source: RBA

What a load of politics

Australia’s Prime Minister’s term ends on 2025, but due to procedural factors around the Senate half term it is estimated the latest the next election can be is May 17th. In theory, it could come as early as March. But as both major parties want lower interest rates, I suspect they’ll hold it as late as possible in hope that the RBA may have already cut by then.

However, current Treasurer Jim Chalmers has been busy doing his bit to make sure that cuts arrive by installing allegedly dovish RBA board members. There is some debate as to whether they are more dovish than current board members, but if they have been hand-picked by the government, my bet is that they are. And as the two latest board members come from banking backgrounds, it breaks the mould of the RBA’s ‘steady as she goes’ approach. Therefore, the pressure to cut sooner may already be in play. But as mentioned above, a weak Australian dollar could be the next political hot potato if the downtrend persists for AUD/USD.

It is also not unreasonable to think that Trump will want a weaker US dollar if its current trend continues, later in the year.

Market positioning for AUD/USD

Throughout 2024 I was running with my conviction that the 2020 low was significant. Yet recent developments has turned that on its head. Prices are quickly making their way to down to the pandemic low on the monthly close chart, which if broken takes the Aussie down to a 21-year low. While this could signal a sentiment extreme over the near-term, market positioning is not.

Large speculators remain net-long, even if by a mere 8.5k contracts. Asset managers have remained net-short since January, but not by an extreme amount. And this leaves plenty of downside potential for AUD/USD as we head into 2025.

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Gross shorts have risen among both sets of traders over the past two weeks, and this is a trend that seems likely to continue while longs are also reduced. In a nutshell, AUD/USD could be trading in the 50s next year.

Source: RBA

Technical analysis for AUD/USD

The -11% fall from the September high has been direct enough to assume prices will eventually break beneath the 2022 low and test 60c. The weekly RSI (14) is also confirming the dip lower without any signs of a bullish divergence, and is yet to test the oversold zone.

We might get a sympathy bounce around the November low before an initial break of 60c. But given it required a pandemic to send the Aussie down into the 50s and it still didn’t stay there for long, there could be some support in the upper 50s and above the pandemic low.

The bias is to fade into rallies in the first half of the year, while the RBA eases and Beijing allow the yuan to slide. Yet things could improve in H2 as trade negotiations are made and sentiment for commodity currencies improves.

Given we could be in for a turbulent year for global markets, I have allowed for a ~16% range between 57c – 66c.

Source: TradingView

— Written by Matt Simpson, Senior Market Analyst

Follow Matt on X: @cLeverEdge