Fed More Dovish, AUD Outperforms
AMP Ltd. believes the Australia-US interest rate differential will turn positive in the next few months. This means AUD-denominated assets could become more attractive and support the Australian dollar. Shane Oliver, Chief Economist at AMP, sees the AUD potentially reaching US$0.70 in the first half of 2026 if the RBA remains on hold while the Fed continues to ease. This morning, the AUD was trading around US$0.6585.
The overnight swap market is pricing in an 85-bps Fed cut through June of next year, while the RBA is only pricing in a 30-bps cut over the same period. Currently, the Fed's benchmark interest rate is 4.00%–4.25%, while the RBA's is 3.60%. The Bloomberg Dollar Spot Index also recorded its biggest weekly decline in nearly two months last week as the US shutdown delayed the release of employment data and made it difficult for the Fed to gauge the direction of the economy.
According to Oliver, the shutdown and data vacuum could put pressure on the US dollar—especially if it leads to layoffs and a perceived decline in the quality of fiscal/monetary policy. In Australia, RBA Governor Michele Bullock signaled patience regarding further cuts on September 30, citing stronger-than-expected household spending, driven by rising real incomes and a tight labor market.
Looking ahead, the key to the AUD lies in the direction of the interest rate differential (RBA vs. Fed), the duration of the US shutdown, and domestic data. If the Fed cuts more aggressively while the RBA holds back, the AUD's premium over the USD will strengthen—giving room for gradual upside. Risks remain: weakening Chinese demand and commodity prices could limit the pace. (asd)
Source: Newsmaker.id
