Deutsche Bank Research has shifted to a bullish stance on the Australian dollar, with macro strategist Lachlan Dynan suggesting the “stars may be aligning” for the Australian dollar, pointing to an improving global backdrop, stronger Chinese economic momentum and stabilising commodity trade as the catalysts for this renewed optimism.
Previously, Deutsche Bank’s forecasts suggested the AUD/USD exchange rate would hover around 70 cents, based on metrics like a solid trade balance, purchasing power parity and interest rate models. However, Dynan noted that these factors alone hadn’t justified a confident long position.
Speaking to InvestorDaily, he explained that “a lot of ingredients” influence currency movements, implying that the broader macro environment is now tipping in favour of the Australian dollar.
“Over the last six months, some of them might have been pointing towards more strength in the [AUD]. For example, interest rate support, which is basically a function of the Reserve Bank of Australia (RBA) being late to join the global cutting cycle.
“That was [a factor] moving in a more supportive direction, but other factors weren’t, for example, the US dollar was strong and we had a relatively strong outlook for [the USD] six months ago as well,” Dynan said.
According to Dynan, the Australian dollar tends to perform best when global equities rally and Chinese economic sentiment improves, regardless of domestic interest rate movements. Rising yields without global risk-on conditions or Chinese support have typically weakened the Australian dollar.
The turning point for Deutsche Bank is a significantly stronger Chinese credit cycle, reaching levels not seen in four years. Additionally, Dynan said, “the worst has passed” in US–China tariff tensions, with greater clarity helping businesses plan ahead despite some tariffs remaining.
“People have finally got some clarity around where tariffs are likely to land, and just getting some clarity really helps. It helps businesses get on with decisions, and it helps people kind of plan for the future,” he said.
“It is looking like there’ll be some level of tariffs around, which will be a drag on growth, but we think, helping to offset that, is that you get a stronger outlook thanks to fiscal policy from the world outside of the US, and that’ll basically help growth.”
Dynan added that recent movements in commodity prices already indicate a lift in Australia’s terms of trade, which could further support the currency. Meanwhile, global volatility has eased as investors adjust to a new normal in trade policy and as central banks respond to low inflation with further monetary support.
Domestically, Dynan dismissed concerns that a more dovish Reserve Bank of Australia could undermine the Australian dollar.
“In the past, lower rates support has been far from a barrier for healthy AUD gains. And separate to that, a more dovish central bank that is easing into a solid economy not only looks bullish for local risk assets, but could also mean an earlier return to hikes,” he said.
Moreover, he noted that the Australian labour market remains strong, with employment-to-population ratios near historic highs. Additionally, the continuation of expansionary fiscal policy under the federal Labor government offers ongoing support to the economy.
Dynan also flagged a potential easing of flows that have previously dragged on the Australian dollar. Namely, while Australia’s basic balance remains healthy, the bank noted a substantial drag from net equity outflows, largely driven by superannuation funds ramping up unhedged investments in offshore equities.
These flows, which have surged to the top of their historical range as a share of gross domestic product, are particularly relevant for spot AUD performance. However, Deutsche Bank believes this pressure could subside if super funds simply moderate their recent aggressive push into overseas equities.
“Recent events do seem to have prompted a rethink among funds,” Dynan said.
But he cautioned that risks to the Australian dollar remain, including uncertainty over tariffs, global growth and US fiscal policy.
“We still don’t know where tariffs are likely to end up, we think we’re passed the peak tariff rhetoric, but a re-escalation of that is [something] we need to be mindful of,” he said.
He further pointed out that the US “twin deficits” (current account and fiscal) pose funding challenges that could impact investor appetite for US assets and influence currency markets.
“They’ve got a current account and a fiscal deficit that they need to fund, and we think it’s going to be a lot harder for them to fund those twin deficits … but there’s an uncertainty there around at what point will global investors be happy or not to invest in the US.”
