Further AUD Downside Risk as UBS Forecasts RBA Rate Cuts

The Australian dollar (AUD) continued to weaken, falling below 0.65 against the US dollar to a notable low since the beginning of the year amid a slight increase in the greenback and domestic employment data showing worrying signs of labor market health.

According to the latest report from UBS, the world's leading investment bank, they still forecast the Reserve Bank of Australia (RBA) will make three rate cuts, each by 25 basis points, in August, November and February next year. After these three adjustments, the benchmark interest rate is expected to fall to 3.1%, a significant low compared to the current level.

Labor market and inflation pressures
AUD's decline was accompanied by the latest jobs report showing that Australia's unemployment rate has hit its highest level since November 2021, raising concerns that the economic growth momentum is weakening.

UBS noted that the second quarter CPI data due on July 30 will play an important role in determining the next direction of monetary policy. The bank expects headline and core inflation to slightly exceed the RBA's forecasts, adding pressure on the RBA to maintain its easing stance.

UBS trading strategy: "Sell Short" AUD/USD
UBS strategists have a clear recommendation: establish a short position on AUD/USD, with the ideal buy level determined at 0.64 or lower. The bank also believes that the current correction could be an attractive long-term buying opportunity, as AUD is trading below fair value.

In addition, UBS also recommends two alternative currency pairs for investors to consider: AUD/CHF and AUD/CNY, which are considered to have the potential to create favorable entry points in the current environment.

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