Key Moments
- Bank of America forecasts AUD/USD at 0.63 in the first quarter of 2026, expecting a weaker Australian dollar despite a hawkish RBA.
- BofA sees continued softness in Chinese aggregate demand into early 2026, weighing on the AUD, which is trading near the top of its 12-month trade-weighted range.
- The bank expects the RBA to hold its cash rate at 3.60% on December 9 and to keep rates unchanged throughout 2026, with rate differentials no longer a clear support for AUD.
China Outlook Drives Bearish View on AUD
Bank of America expects the Australian dollar to lose ground against the U.S. dollar in early 2026, setting a target for AUD/USD at 0.63 in the first quarter. This call comes even as the Reserve Bank of Australia (RBA) maintains a hawkish policy stance.
The bank’s analysts highlight that China’s manufacturing data has been “unequivocally weak,” and its economists project that Chinese aggregate demand will remain subdued into early 2026. Given Australia’s sensitivity to Chinese economic conditions, this weak demand outlook is a key factor behind Bank of America’s negative view on the currency. The Australian dollar is currently trading near the top of its 12-month trade-weighted range. As a result, the downside risks in their assessment appear more pronounced.
RBA Policy Settings and Domestic Economic Backdrop
Bank of America expects the RBA to keep the cash rate at 3.60% on December 9. Furthermore, the bank anticipates a unanimous decision. The domestic data backdrop has been firm, supporting the central bank’s hawkish tone.
| Indicator | Latest Reading / Assessment |
|---|---|
| RBA cash rate (expected decision) | Hold at 3.60% on December 9, unanimous |
| Inflation | Above the RBA’s 2-3% target band |
| Unemployment (October) | 4.3% |
| GDP growth | Above trend in a year when the cash rate averaged 4.1% |
Bank of America describes the recent data as hawkish. Inflation continues to exceed the RBA’s 2–3% target range. In addition, unemployment fell to 4.3% in October. GDP also expanded at an above-trend pace during a period when the cash rate averaged 4.1%.
Market Pricing vs BofA Rate Path Expectations
According to the article, market pricing now shows about a 50-50 chance of an RBA rate increase next year. However, Bank of America disagrees with this view. In contrast, Bank of America maintains that the central bank will keep policy rates unchanged throughout 2026.
The bank argues that this anticipated policy trajectory reduces the appeal of the Australian dollar from a rate differential perspective. It notes that interest rate differentials are “no longer an obvious tailwind for AUD,” suggesting that carry-related support has diminished.
RBA Communication Strategy and Risk Balance
Looking ahead, Bank of America expects forthcoming RBA communications to remain cautious and highly data-dependent. The bank anticipates that the central bank will avoid firm forward guidance, while still acknowledging that further rate hikes could occur if economic momentum stays strong.
Despite seeing near-term risks leaning toward additional tightening, the bank does not expect an imminent resumption of rate hikes. It concludes that “the bar for restarting a hiking cycle is high,” particularly as labor market conditions are expected to gradually ease.
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