The Australian dollar's uphill battle

Current performance and short-term outlook

The AUD/USD commenced 2025 at approximately 0.6150 in January, hovering near five-year lows due to sustained US dollar strength bolstered by robust US economic indicators. Meanwhile, uncertainties regarding China's economic performance and the potential impact on mineral prices exerted downward pressure on the AUD. By early March, a modest recovery to 0.6350 occurred, though market sentiment remains predominantly cautious.

The NAB FX strategy team projects stabilisation around 0.65 midyear with potential movement toward 0.67 by December. However, substantial downside risk exists. Currency strategists acknowledge the possibility of sub-0.60 levels should specific risk scenarios materialise, particularly regarding Chinese economic performance or unanticipated US Federal Reserve policy adjustments. While it is not our base case, there are a few key factors to keep an eye on throughout the year.

Key determinants for 2025

Monetary policy divergence: Reserve Bank of Australia versus Federal Reserve

The interest rate differential between Australia and the United States represents a fundamental driver for AUD/USD fluctuations throughout 2025.

The Reserve Bank of Australia (RBA) made its first rate cut in February 2025, marking the first reduction since November 2020, over four years ago. It is anticipated to implement additional monetary easing by mid-year as inflation moderates and growth considerations become paramount. Futures markets indicate approximately two more interest rate cuts by November, potentially reducing the cash rate from 4.1% to approximately 3.60%. This dovish orientation contrasts markedly with the previous year's policy stability.

Conversely, Federal Reserve officials have adopted a more measured approach following 100 basis points of reductions last year. With upward revisions to US growth forecasts and persistent inflationary pressures, the narrowing interest rate differential creates an unfavourable environment for the Australian dollar. Real rate differentials currently trend against the AUD, historically a reliable indicator of currency depreciation.