AUD/USD Outlook

A turn in the commodity cycle and an improvement in Australia's economy are expected to lead to broad stability in AUD in 2016. Having fallen sharply over much of this year amid falling iron ore prices, AUD/USD appears to have found reasonable support around 0.70. 

Over the past three months, there has been a noticeable improvement in Aussie dollar sentiment. Despite the overhang from a sharp fall in mining investment, the Australian economy expanded by 0.9% in the third quarter, lifting the annual rate of growth from 1.9% to 2.5%. Notably, growth was supported by a surge in exports and a strong company profits. Recent forward-looking indicators, including Australia's manufacturing PMI, point to a continued improvement in 2016. 

Near term, however, there is a risk of the AUD coming under renewed downward pressure given recent commodity price falls and a likely US policy tightening. Nevertheless, a move back towards the RBA's desired level of around 0.75 should be in prospect by mid-2016. The RBA is likely to resist any appreciation in AUD/USD much above 0.75-0.80 until recovery is more established.