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The Australian Dollar will likely struggle in 2024 as global growth slows under the weight of the interest rate tightening cycle, drowning out any supportive impact from Australia's yield advantage.

This is according to NatWest, where analysts expect slowing global growth to weigh on Antipodean currencies for the larger part of the coming year.

"Monetary policy operates with a lag, and considering the cumulative tightening done so far across the developed economies, the likelihood of further weakness in the developed world including Europe and the US will further weigh on Antipodean currencies in coming quarters," says Antony George, G10 FX Strategist at NatWest.

He adds that China - the largest trading partner for both Australia and New Zealand - will experience weak growth next year.

"For Australia, further decline in terms of trade and weaker global growth will weigh on exports," says George.

NatWest Markets expects a further decline in the Australian Dollar's terms of trade due to a correction in commodity prices due to a decline in global growth and weaker growth in China.

Above: Australia's trade balance. Image courtesy of NatWest. Track AUD with your own custom rate alerts. Set Up Here.

"Even though weaker China growth to some extent is priced, we think the weak demand and real estate sector stress will exert downside pressure on the two currencies," says George.

China has initiated a number of measures to counter the slowdown in the property sector; however, economists at NatWest reckon this will, at best, stabilise the sector.

Analysts have attributed Chinese growth concerns as a key reason why the Australian and New Zealand Dollars have struggled for much of 2023.

Above: Australia's major exports. Image courtesy of NatWest.

At the time of writing, the Australian Dollar is the third-worst performing currency of the year in the G10 space, even when the rebound of the past two weeks is considered.

NatWest meanwhile tips the Reserve Bank of Australia to raise interest rates again, owing to resilient growth and persistent inflation in the services sector.

This would suggest that Australian bond yields will be supported relative to peers, offering a boost to AUD over the coming months.

But NatWest says although yield differential plays a role in driving the currency, expect global growth to dominate over the medium term.

"Although the currencies track well with yield differential, our Growth Basket has a tighter correlation," says George. "We expect global growth to dominate the Antipodean currencies in the medium term rather than relative yields."

NatWest maintains a long-held bearish view on Antipodean currencies heading into 2024, and is 'short' AUD and NZD from a strategic standpoint.