The Australian dollar (AUD) is renowned for its sensitivity to global economic sentiments, particularly in a climate where trade policies fluctuate with political changes. As President-elect Trump prepares to take office, analysts from Bank of America (BofA) present three distinct scenarios for the trajectory of the AUD through mid-2025, each shaped by varying U.S. economic policies and global trade dynamics. Understanding these scenarios is crucial for investors and market participants alike, given the inherent uncertainties that linger over international trade.
In BofA’s baseline forecast, the AUD is set to depreciate, hitting approximately 0.63 USD by mid-2025. This forecast operates under the assumption that the United States will maintain trade policies akin to those during Trump’s first term, characterized by the imposition of tariffs that strain relationships with trading partners, especially China. A continued rise in U.S. equities, with expectations of double-digit returns for indices like the S&P 500, could provide some stability in the face of currency depreciation. However, this positive equity performance may not be enough to counteract declines in the prices of industrial metals, vital to Australia’s economic health, and a gradual increase in tariffs will likely amplify the AUD’s struggles.
BofA’s second narrative depicts a far bleaker outcome where a trade war escalates dramatically. Should this scenario unfold, the AUD could plummet to as low as 0.55 USD. Analysts speculate that a severe devaluation of the Chinese yuan (CNY) and plunging prices of industrial metals would not only harm Australia’s economic prospects but also contribute to instability across global equity markets. In such a scenario, Australia’s inflation and growth would come under intense pressure, leading to prolonged periods of weakness for the AUD, potentially keeping it below the 0.60 USD mark for an extended time. This situation paints a picture of significant potential setbacks for the Australian economy, rooted in its reliance on commodity exports and the dynamics of international trade relations.
Conversely, BofA’s third scenario offers a more tempered optimism, suggesting that if the new U.S. administration adopts policies reminiscent of Ronald Reagan’s tenure—focused on tax reductions, deregulation, and minimal trade disruption—the AUD could witness gains, potentially reaching 0.70 USD. Such policies may invigorate U.S. equity markets and contribute to stability in the CNY, benefiting the Australian dollar and its associated economy. In this scenario, a bullish market sentiment could generate positive feedback, reinforcing the AUD’s value as global markets respond favorably to renewed economic vigor.
Ultimately, the trajectory of the Australian dollar remains closely tied to not only U.S. economic policies but also its fluctuating relationship with global commodity prices and the CNY. BofA analysts stress that shifts in U.S. policies will play a pivotal role in the near-term forecast for the AUD. In this complex interplay of factors, market participants must remain vigilant, as the predicted outcomes delve deep into the interconnected nature of global trade movements and domestic economic stability.
The response of the AUD to forthcoming economic policies in the U.S. will undoubtedly shape the currency’s pathway and influence investment strategies in the months to come.