The Australian dollar is likely to rise due to more currency hedging by large Australian pension funds. These funds have a lot of overseas investments and significantly increase the demand for the AUD. Fears about global tariffs and possible interest rate cuts from the U.S. Federal Reserve may weaken the U.S. dollar. This situation may lead Australian pension funds to hedge their U.S. assets, further boosting demand for the AUD.

Analyst Forecasts

Analysts have different predictions based on these trends. Ray Attrill from NAB expects the AUD to rise nearly 3% by year-end. Citigroup believes the AUD/USD rate will stay above 0.64, while Deutsche Bank targets 0.67 for the AUD/USD by the end of the year. Given the increased hedging by Australian pension funds, we think derivative traders should prepare for a stronger Australian dollar. These funds manage over A$3.7 trillion, so their move to hedge U.S. assets is a major and ongoing source of demand for the local currency. This trend is likely to support the AUD against the U.S. dollar in the coming weeks. The main reason for this change is the different monetary policies in both countries. Australia’s most recent CPI was 3.6%, putting pressure on its central bank to keep interest rates steady. Meanwhile, markets expect at least one cut from the U.S. Federal Reserve this year. This growing interest rate gap makes the Australian dollar more appealing.

Trading Recommendations and Strategies

We recommend traders think about buying AUD/USD call options to take advantage of the expected rise. This approach allows traders to join in on the rally predicted by analysts like Mr. Attrill while limiting risk to the premium paid for the options. Targeting strikes near the 0.67 mark matches the year-end forecast from one of the banks mentioned. Historical data supports this view, as the AUD usually performs well when the U.S. central bank starts lowering rates while Australia keeps its rates unchanged. This pattern suggests that the current economic situation is favorable for this currency pair. The extra hedging by large funds only strengthens this historical trend. While we have a positive outlook, we see the 0.64 level identified by another analyst firm as an important support level. If the price falls below this, it may indicate a potential failure of the bullish outlook, prompting a reassessment of long positions. For those trading futures contracts, this level is a good place for stop-loss orders. Create your live VT Markets account and start trading now.

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