$A predicted to sink below US60¢ next year

National Australia Bank and Westpac, meanwhile, argue that the US economy remains on track for a soft landing.

“The Fed has broken the back of US inflation and inflation will fall faster than the Fed’s current projections and that’s going to give them the comfort to cut rates potentially aggressively next year,” said Ray Attrill, head of FX strategy at NAB.

NAB estimates the Australian dollar will rise to US71¢ by mid-year and US75¢ by December 2024.

“Once the Fed starts cutting rates, it will continue to bring the US dollar lower and that’s the number one rationale for expecting the Aussie to do better,” he said.

Westpac expects the US economy to cool, but also highlights that the labour market was historically strong and there was a considerable pipeline of business investment.

Meanwhile, Westpac forecasts the $A to rise to US68¢ by mid-2024 and cautiously ascend to US70¢ by the end of next year.

The local dollar has shed more than 4 per cent this year largely because US government bond yields are more attractive than their Australian counterparts. It was trading at US65.42¢ on Thursday.

CBA expects the depreciation in the Australian dollar to be short-lived because the expected US recession will force the Fed to cut interest rates aggressively by May next year. Mr Capurso also expects more rate cuts than the market is currently pricing.

Markets imply more than 120 basis points worth of Fed rate cuts next year, taking the funds rate to a mid-point of 4.1 per cent. CBA expects an additional 20 basis points of rate cuts on top of that.

Lower US borrowing costs will lift home construction and consumption but also weigh on the current account deficit amid high US government spending, according to CBA, eventually placing the greenback under pressure.

“The cuts to interest rates will support the global economic recovery and risk appetite, credit spreads and equity markets, undermining the US dollar,” Mr Capurso added.

CBA forecasts the local dollar to rebound to US72¢ by the end of next year as central banks reduce rates and inflation returns closer to their respective targets.

China is expected to mildly underpin the $A, NAB’s Mr Attrill added. “Chinese authorities are showing a willingness to use fiscal policies to support its slowing economy,” he noted.

The Australian dollar is sensitive to news out of China, its biggest customer of resources, particularly iron ore.

Westpac’s senior FX strategist Sean Callow noted that investors would need to change their mindset about China for the Australian dollar to climb sharply higher. “China’s story should be helping, but the market does not believe it right now,” he said.