Synopsis:

Morgan Stanley forecasts AUD to outperform within the dollar bloc, with AUD/USD rising to 0.72 and AUD/NZD reaching 1.16 by the end of 2025, supported by Australia's favorable risk sensitivity, trade exposure, and a hawkish RBA stance.

Key Points:

• AUD/USD Outlook:

  • Expected to climb to 0.72 by end-2025 due to Australia's resilience to trade risks and its positive correlation with global risk sentiment.
  • A relatively hawkish Reserve Bank of Australia (RBA), which is projected to begin cutting rates only in May 2025, underpins this forecast.
  • With a high policy rate expected after the Fed, Australia maintains a competitive rate advantage within G10 currencies.

• AUD/NZD Outlook:

  • Anticipates AUD/NZD rising 5% to 1.16 by 2025, reflecting New Zealand’s relatively weaker economic and monetary policy outlook.
  • The divergence is driven by a more cautious Reserve Bank of New Zealand (RBNZ) stance, trailing the RBA in rate adjustments.

• Dollar Bloc Dynamics:

  • Among the dollar bloc currencies, AUD is positioned as a clear outperformer due to its limited exposure to trade risks compared to peers and stronger domestic economic fundamentals.

Conclusion:

Morgan Stanley projects AUD to lead gains within the dollar bloc, driven by a resilient domestic economy and a hawkish RBA. While NZD is expected to lag, AUD/NZD's climb to 1.16 reflects this divergence, offering potential opportunities in cross-pair strategies.