In the face of a firmer US dollar and US-related trade risks, the Australian dollar could linger in the mid-$0.60s over the first half of 2025 before undertaking a gradual rope climb higher later in the year:

Market volatility is likely to pick up over coming months as US President-elect Trump enacts his policy agenda—but forward-looking currency markets have already partially priced in this risk, with the exchange rate trading at a discount to our various ‘fair value’ estimates.

Authorities in China are likely to offset US tariff-induced export pain through a series of increases in internally focused infrastructure investment. This commodity-intensive effort should help boost Australia’s key exports. At the same time, we think domestic conditions will remain relatively sturdy, with elevated levels of demand across several sectors combining with fiscal support to keep unemployment low and inflation sticky.

The Australian labour market has defied expectations.
Deviation in unemployment rate from end of 2019, %
December 2019 – October 2024

Against this backdrop, the Reserve Bank of Australia should lag its counterparts in terms of when it starts and how far it goes during the easing cycle. Over the medium term, diverging policy trends between central banks could see the Aussie outperform currencies such as the euro, New Zealand dollar, and Chinese renminbi.

Elevated activity levels are holding up inflation.
Core inflation rates, %
January 2018 – October 2024