The Australian dollar is a 'phenomenal trade' and could climb 8% by next year, says UBS

• UBS issued an optimistic outlook for the Australian dollar, saying it is a "phenomenal trade."
• The bank's head of commodities said its attractiveness comes against a weakening US economy.

As the US economy falters, the Australian dollar appears to have become an attractive option over the greenback as far as UBS is concerned.

The bank's head of commodities and Asia-Pacific currencies, Dominic Schnider, said an anticipated slowdown in US growth against a more robust expansion in Australia will keep its currency moving higher, Bloomberg reported.

"The one trade I would love to do is being long on the Australian dollar -- I still think it's a phenomenal trade," Schnider told Bloomberg.

"Once we see that the US slows a little bit and the Australian economy just doing very well and brimming along, people will suddenly say that it shouldn't trade where it is," he added.

According to Bloomberg, UBS anticipates the Australian dollar will rise to 78 US cents by the end of the first quarter of next year. At 5:08 ET on Monday, the currency stood at 72 US cents. It's down around 0.5% against its US counterpart so far this year.

Bullish forecasts around the Australian dollar were echoed by economists at the International Monetary Fund. In a recent blog post, economists wrote that the US dollar's dominance is declining in the face of non-traditional currencies including the Swedish krona, the Korean won, and the Australian and Canadian dollars.

The Bank of Israel mirrored optimism over the Australian dollar too, recently announcing it was changing up its allotment of more than $200 billion in reserves to include Canadian and Aussie dollars, the Chinese renminbi, and the Japanese yen while reducing its share of US dollars, per Bloomberg.

It comes against a backdrop of a resilient Australian economy that has grown more quickly than expected. Gross domestic product expanded at an annual rate of 3.3% in the first quarter of this year, compared with 3.5% in the United States.

The Australian government says it expects the economy to be 6.6% larger by the end of the year than in 2019, before the pandemic.

To that end, the Reserve Bank of Australia was prompted to lift interest rates by 0.25 to 0.35%, the first rate hike since 2010, in an effort to tame inflation. With a second rate expected on June 7, Saxo Bank expects interest rates could potentially climb to 3% in Australia this year.

"As the economy is growing stronger than expected, and Labor's new policy will see employment rise and wage pressure rise too, the RBA will have more room to rise rates across the year," Saxo strategists said.

But for Schnider, what gives Australia the edge as more interest rate hikes are on the horizon, is its commodity-driven economy. It is a major exporter of wheat, coal and iron ore, all of which have soared in price, especially since the Russian invasion of Ukraine.