Higher commodity prices steepen AUD, likely to trade at 74 U.S. cents by year-end

The Australian dollar has shown resilience over the past year. After some volatility in early 2016, the AUD has traded within a narrow band over the past three months. While the AUD has traded a little higher than markets had anticipated, it remains close to the mid-70 cent range where it was expected to stay for the remainder of this year.

Stronger-than-expected commodity prices are the major factor keeping the AUD elevated. Monetary and fiscal stimulus in China has driven resurgence in Chinese demand creating key support for commodity prices and the Australian dollar.

"We do not expect a significant appreciation in the US dollar, and that it will track broadly sideways over the next year,"  

The outlook for a steady US dollar suggests that commodity prices are not expected to undergo large swings. That said, a sustained rally in commodity prices is unlikely.

Our expectations are for the RBA to cut official interest rates by a total of 50 basis points before mid-next year, which is more than markets are currently anticipating. However, rate cuts from the RBA have taken a backseat in determining the Australian dollar outlook.

Over the near-term, we expect the AUD to trade near its current range and we have maintained our year-end forecast of 74 US cents. We expect it will trade within the US 70 cent range over the coming year.