Overview
Bank of America has revised its forecast for the Australian dollar, increasing its projected AUD/USD rate for the fourth quarter of 2026 to 0.73. The update follows a recent move by the Reserve Bank of Australia to raise interest rates - the banks first increase since 2022 - a policy shift that has left Australian policy rates above those of the U.S. Federal Reserve for the first time since 2017, according to Bank of Americas analysis.
Drivers cited by the bank
In its assessment, the institution highlighted several supporting factors for the Australian currency. Gradual increases in commodity prices were named as one source of strength. The bank also expects the U.S. dollar to decline, particularly versus Asian currencies, which it sees as another tailwind for the AUD.
Potential additional upside
Bank of America flagged a scenario that could add further upside to its projection: if the historically strong correlation between the Australian dollar and risk assets weakens, Australian superannuation funds might adjust their hedge ratios. Such a shift in hedge behavior could exert additional upward pressure on the AUD if it were to occur.
Downside risks
The bank warned that crowded long positions in the Australian dollar are an important downside risk to its revised forecast. Concentrated positioning can amplify moves in either direction, and in this case Bank of America identified the buildup of long AUD exposure as a vulnerability that could reverse gains.
Market implications
The combination of higher domestic policy rates, commodity price support and expectations of a weaker U.S. dollar form the core rationale behind the upgraded forecast. Pension fund hedging behavior and positioning in currency markets are highlighted as structural and tactical factors that could materially influence outcomes around the banks updated AUD/USD target.
This article presents Bank of Americas forecast and the factors the bank identified in its analysis.