Bank of America expects the Australian dollar to weaken against the U.S. dollar in early 2026, targeting AUD/USD at 0.63 in the first quarter despite the Reserve Bank of Australia’s hawkish stance.
The forecast comes as BofA analysts note that China’s manufacturing data has been "unequivocally weak," with the bank’s economists anticipating continued weakness in Chinese aggregate demand into early 2026. This outlook weighs heavily on the Australian dollar, which is currently trading near the top of its 12-month range on a trade-weighted basis.
Bank of America expects the RBA to maintain its cash rate at 3.60% at its December 9 meeting in a unanimous decision. Recent economic data has been hawkish, with inflation remaining above the RBA’s 2-3% target band, unemployment falling to 4.3% in October, and GDP growing above-trend during a year when the cash rate averaged 4.1%.
While the market is pricing a 50-50 probability of a rate hike next year, BofA maintains its view that the RBA will keep rates unchanged throughout 2026. The bank suggests this policy divergence means interest rate differentials are "no longer an obvious tailwind for AUD."
BofA anticipates the RBA’s upcoming communications will be non-committal and emphasize data-dependence, though likely acknowledging that further rate hikes remain possible if economic strength persists. Despite near-term risks skewed toward hikes, the bank believes "the bar for restarting a hiking cycle is high," particularly as labor market conditions gradually soften.
