Australian and New Zealand Dollars Face Uncertain Near-Term Outlook Despite Long-Term Optimism
Foreign exchange analysts have tempered their near-term forecasts for the Australian and New Zealand dollars, yet maintain a bullish stance on the long-term outlook despite the significant decline in value these currencies have experienced over recent weeks. A survey of 55 analysts revealed median predictions for the Aussie to be cut to $0.7200 on a one-month horizon, down from $0.7275 in the previous poll.
Notably, however, projections for three, six, and 12 months remained unchanged at $0.7300, $0.7400, and $0.7500 respectively. This resilience in long-term forecasts may seem surprising given the significant drop in value of the Aussie since early September, with the currency hitting 32-month lows at $0.7066.
The trade-exposed nature of the Australian dollar has made it a popular choice among investors to wager on or hedge against emerging market tensions and risks to the Chinese economy from U.S. tariffs. A sudden surge in U.S. bond yields and hawkish commentary from the Federal Reserve have also contributed to the increase in the value of the U.S. dollar more broadly.
In contrast, the Reserve Bank of Australia has repeatedly emphasized that interest rates will remain at historic lows for an extended period. According to NAB’s head of FX strategy Ray Attrill, this outlook is expected to hold: "We see AUD/USD as a ’70-75 cents currency’ for a good while to come, but with risk now skewed toward spending at least some time sub-$0.70 in the next six months or so if emerging market pressures do intensify significantly."
While only a small number of analysts forecast a drop under $0.7000, the lowest prediction was for $0.6700 in three months, indicating relatively limited downside risk. Attrill argued that further out, the U.S. dollar would face its own set of challenges due to the United States’ expanding budget and trade deficits: "Successful efforts by China to offset much of the growth drag from weaker exports via policy stimulus would also help AUD."
For the New Zealand dollar, analysts again cut their forecasts by a cent or so but still lagged behind market expectations. The currency was last trading at $0.6481 compared to the $0.6700 seen in the previous poll. Expectations were now for $0.6600 in one and three months, with $0.6700 and $0.6800 pencilled in for six and 12 months respectively.
However, forecasts extended as low as $0.6009 on a six-month view, indicating greater downside risk for the kiwi. Westpac’s head of NZ market strategy Imre Speizer expressed a bearish outlook: "We remain bearish, targeting $0.6400 or lower by year-end." He attributed this to an expectation that the U.S. dollar will continue to rise as the Fed raises interest rates further and U.S. economic growth remains strong.
The yield spread between U.S. and NZ 10-year Treasury debt is currently near the widest in history, with yields on 10-year U.S. debt standing at 57 basis points above those in New Zealand. This discrepancy suggests that the kiwi may continue to face challenges as market participants adjust their expectations.
Despite these short-term concerns, long-term optimism remains a dominant theme among analysts. Their projections for AUD/USD and NZD/USD suggest that both currencies are expected to recover and even surpass their current levels over the next 12 months. The resilience of these forecasts may reflect the ongoing economic growth in Australia and New Zealand, as well as the potential for further monetary policy easing in these countries.
Factors Influencing Near-Term Outlook
Several factors have contributed to the decline in value of both currencies, including emerging market tensions and risks to the Chinese economy from U.S. tariffs. A sudden surge in U.S. bond yields and hawkish commentary from the Federal Reserve have also driven the increase in the value of the U.S. dollar.
However, analysts believe that these factors will eventually lead to a reversal in fortunes for both currencies. Attrill argued that successful efforts by China to offset the growth drag from weaker exports via policy stimulus would help AUD, while Speizer pointed to the expectation of continued U.S. economic growth and interest rate increases as driving forces behind his bearish outlook on NZD.
The trade-exposed nature of both currencies has made them vulnerable to emerging market tensions. However, analysts believe that these pressures will eventually abate, allowing both currencies to recover and potentially even surpass their current levels over the next 12 months.
Market Expectations vs. Actual Performance
While market expectations for both AUD/USD and NZD/USD have been revised downward, long-term projections remain optimistic. Analysts expect both currencies to recover and reach their predicted levels within the next 12 months.
However, actual performance has diverged from these forecasts in recent weeks. The Aussie has shed almost two cents since early September, hitting 32-month lows at $0.7066. The kiwi has also declined significantly, with market expectations trailing behind actual performance.
This divergence suggests that analysts may be underestimating the risks facing both currencies or overestimating their resilience. However, long-term optimism remains a dominant theme among analysts, reflecting ongoing economic growth in Australia and New Zealand as well as potential for further monetary policy easing in these countries.
Conclusion
The near-term outlook for both AUD/USD and NZD/USD remains uncertain due to emerging market tensions and risks to the Chinese economy from U.S. tariffs. A sudden surge in U.S. bond yields and hawkish commentary from the Federal Reserve have also driven the increase in value of the U.S. dollar.
However, analysts maintain a bullish stance on the long-term outlook for both currencies, with projections suggesting they will recover and even surpass their current levels over the next 12 months. This optimism reflects ongoing economic growth in Australia and New Zealand as well as potential for further monetary policy easing in these countries.
While market expectations have been revised downward, analysts expect both currencies to reach their predicted levels within the next 12 months. However, actual performance has diverged from these forecasts in recent weeks, suggesting that analysts may be underestimating the risks facing both currencies or overestimating their resilience.
Ultimately, the outcome for both AUD/USD and NZD/USD will depend on a range of factors including emerging market tensions, U.S. monetary policy decisions, and economic growth in Australia and New Zealand. While long-term optimism remains a dominant theme among analysts, short-term risks and uncertainties must not be ignored.