The Australian Dollar (AUD) is a popular currency because of its proximity to Asia, stability, and favourable trade policies. However, a number of factors can affect the value of this currency.

A major factor that could impact AUD price predictions is interest rates. The Reserve Bank of Australia (RBA) has a mandate to control inflation and frequently raises its rates.

Inflation

The Australian dollar is one of the world’s most traded currencies, with the country’s central bank taking seriously the need to curb inflation. However, the RBA’s comparatively conservative approach has been contrasted by an aggressively hawkish Fed, which has hiked rates seven times this year.

The AUD/USD exchange rate has been under pressure since the beginning of 2022. This is largely due to China’s prolonged Covid lockdowns and the Federal Reserve’s aggressive rate hiking cycle, both of which have hurt Australia’s domestic growth.

While the Australian dollar has lost 7% of its value against the United States currency this year, it has remained resilient against other major trading partners, such as the Euro and Yen. While the Australian dollar is not a direct determinant of inflation, the fall in the exchange rate can have an impact on imported goods priced in US dollars.

The RBA’s decision to slow down its interest rate hikes has been a boon for the Aussie dollar, as it will allow for a gradual rise in cash rates over time. This will allow the bank to bring inflation back to target while also not pushing the economy into recession.

Interest Rates

The Reserve Bank of Australia (RBA) has been hawkish in recent years, raising interest rates seven times since May. Its rate hike on Tuesday slowed its tightening cycle by 25 basis points, albeit with explicit comments that it was still on a “pre-set path” for further increases.

This shift in monetary policy will impact AUD/USD and the Australian economy. It is likely to slow growth and dampen inflation, which could compel the RBA to halt its hiking cycle in 2023.

The AUD is up around 10% against the US dollar year to date, which has prompted some risk aversion in equities markets. However, the AUD is still gaining versus all other major currencies. The AUD/USD may also see further gains in the first half of 2023, as it is expected to benefit from China’s reopening after Covid lockdowns and the Fed’s change in course.

Trade Balance

The trade balance between Australia and its exports and imports is a key indicator of how well the Australian economy is performing. It can also give investors an idea of how the local economy is faring against its key trading partners, China and the US.

The latest release of the Australian Bureau of Statistics (ABS) trade balance showed that despite strong domestic growth, Australia’s net trade surplus was down a further 0.49% in August. This was down significantly from July’s 3.24% surplus.

In the coming months, we will see a number of economic indicators that can be used to forecast the AUD price. The most important of these is the CPI inflation report, which will be released on 26 October and will provide some insight into how much more the RBA will need to hike interest rates before the economy begins to slow down.

The central bank has been cautious about raising rates, but recent data shows that underlying inflation in Australia is rising quickly. It will be a critical piece of evidence when the RBA decides whether to hike rates again in November.

Economic Growth

The AUD price forecast is closely tied to Australia’s economic growth. The Australian dollar is a commodity currency, meaning that changes in the prices of commodities such as natural gas, iron ore, coal, and agricultural goods have an impact on its strength.

Australia’s economy has been resilient against the global recession and a hawkish Fed, but growth is expected to slow sharply in 2022-2023 as higher inflation curbs household spending. The economy’s growth rate is projected to fall from 3.7% in 2022 to 1.5% in 2023, largely because of higher interest rates and persistent inflation.

Inflation is forecast to remain elevated in 2023 and 2024, albeit at a lower rate than in 2022. However, there is significant uncertainty regarding the transmission of tighter monetary policy to domestic demand. The cash rate is expected to peak at around 3 1/2 per cent in mid-2023 before easing back to around 3 per cent by the end of 2024.