BofA Projects Further Euro Weakness Against Commodity-Linked Aussie and Kiwi Dollars

Bank of America analysts anticipate the euro will continue to weaken against the Australian and New Zealand dollars in the coming months, citing a constructive outlook for key commodities that support the two Pacific currencies.

BofA's Forecast

According to a recent analyst note, the bank expects the euro to depreciate further against both the Australian dollar (AUD) and the New Zealand dollar (NZD). This view is based on the firm's underlying bullish forecast for the AUD/USD and NZD/USD currency pairs over the next few months, which translates into expected weakness for the EUR/AUD and EUR/NZD crosses.

Commodity Outlook Supports Aussie, Kiwi

The positive stance on the Aussie and Kiwi is underpinned by Bank of America's commodity strategists, who remain constructive on industrial metals and agriculture. They argue that a confluence of factors looks to exaggerate supply and demand imbalances, which would be supportive of prices.

Key drivers for the commodity markets include:

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• A surge in capital expenditure related to Artificial Intelligence (AI)
• Investment linked to the global energy transition
• Potential supply disruptions from weather risk

As major exporters of raw materials, the economies and currencies of Australia and New Zealand are closely tied to the performance of global commodity markets.

Headwinds and Risks

Despite the bullish commodity outlook, BofA acknowledges potential headwinds. Weak domestic demand in China, a primary trading partner for both nations, presents a significant risk. Historically, a lower credit impulse in China has led to reduced import demand from Australia and New Zealand.

Furthermore, the bank notes that investor positioning in the New Zealand dollar appears vulnerable, with the Australian dollar also showing some signs of being a crowded trade. This suggests that these currencies could be susceptible to a sharp reversal if market sentiment shifts.