Australian Dollar Forecast: ING Backs Carry and Citi Warns on China
Foreign exchange analysts at ING eye Australian Dollar gains despite a pause in RBA tightening, while Citi warns weaker Chinese credit and housing could undermine the recovery.
The Australian Dollar to US Dollar exchange rate recovered to US$0.7018 on Wednesday, up 0.71%, after Tuesday’s divided Reserve Bank of Australia decision unsettled expectations for further tightening.
Euro to Australian Dollar (EUR/AUD): 1.602032 (-0.13%)
ING still expects AUD/USD to reach 0.710 by end-2026, arguing that the currency’s interest-rate return remains attractive even if the RBA has finished raising rates.
Citi sees greater danger in weaker Chinese credit growth, a slowing Australian housing market and investors already holding substantial bets on an Aussie recovery.
A high rate can support the Aussie without another hike
The RBA raised its cash rate by a quarter-point to 4.85% on Tuesday, with six members supporting the increase and three preferring to hold.
The split matters after the pre-meeting focus on whether hawkish guidance would accompany the increase.
ING strategist Francesco Pesole saw less conviction about further tightening, alongside a weaker growth outlook:
“At the press conference, Governor Michele Bullock reinforced the RBA’s wait-and-see approach, stressing that monetary tightening still has to feed through to the economy. She left the door open to further tightening, but the bar is clearly higher now. The RBA appears happy to assess the impact of previous hikes before acting again.”
Pesole’s positive currency call does not require the RBA to keep delivering increases:
“This is in line with our forecast of no further RBA hikes. Despite today’s correction, we remain positive on AUD, which offers the best short-term carry in G10, including on a volatility-adjusted basis.”
Carry is the interest-rate return available from holding a currency against a lower-yielding alternative.
That income can continue during a policy pause, although a fall in the exchange rate can more than offset it.
Pesole judged that Tuesday’s market pricing already allowed for some easing:
“Markets price only a one-in-three chance of another hike at the coming meetings and already embed 13bp of easing by the end of 2027, leaving AUD with limited risk of further dovish repricing for now.”
“The current environment remains a bit challenging for AUD amid AI-related jitters, but we remain confident that our 0.710 AUD/USD target can be reached by year-end.”
Housing and China complicate the interest-rate advantage
Citi had turned bearish on the Australian Dollar before the November meeting, citing a downturn in China’s credit impulse and Australian housing.
The credit impulse measures changes in the flow of new lending, offering a guide to future demand rather than simply the existing stock of debt.
A weakening Chinese credit cycle can threaten demand for Australian commodities, while falling house prices can restrain domestic consumption.
For Citi, those pressures could outweigh the return on Australian assets, especially if the RBA no longer supplies fresh support through higher expected rates.
Citi regarded a hawkish RBA as an obstacle to its bearish currency view:
“The RBA’s surprisingly dovish hike overnight (6-3 vote split and removal of hawkish guidance) removes that headwind as it may imply the RBA has reached terminal pricing (though hawkish risks remain).”
Citi also sees vulnerability in investors’ existing positions:
“Still, our flows data imply that a significant buildup of leveraged AUD longs still exists, which are at risk of an unwind should the backdrop evolve in line with recent trends.”
If investors cut those positions, selling could put pressure on the Aussie even while its interest-rate return remains favourable.
The RBA’s updated economic projections capture the difficult balance: weaker housing and tighter policy are expected to hold growth below trend, yet headline and underlying inflation are forecast to remain above 3% until end-2027.
Bullock has not committed to a pause, and the inflation forecast leaves room for further tightening if price pressures prove persistent.
Goldman Sachs nevertheless expects a prolonged period of unchanged rates before cuts begin late next year:
“Our base case is that the RBA holds policy for an extended period until a gradual easing cycle commences from 4Q2027.”
What This Means for AUD/USD
Wednesday’s return above US70 cents brings ING’s end-2026 forecast closer, but the bank’s case still depends on investors valuing the Aussie’s interest-rate income despite a less aggressive RBA outlook.
For Citi, the more important test is whether Chinese lending and Australian housing stabilise. Continued deterioration could prompt investors to unwind bullish positions, eroding the benefit of carry.
Further inflation surprises would complicate both assessments. The RBA’s divided vote gives it reason to wait, but its own projections leave a lengthy period of above-target inflation to manage.
