The Australian dollar's decade-long decline remains difficult to reverse. Will there be a real turning point in 2026?

The Australian dollar (AUD), as the fifth-largest global trading currency (after the US dollar, euro, Japanese yen, and British pound), has always attracted significant attention regarding its exchange rate against the US dollar. The “AUD/USD” trading pair features high liquidity and low spreads, making it one of the top five most active currency pairs worldwide. Investors can effectively engage in short-term trading or medium- to long-term positioning.

However, over the past decade, the overall performance of the AUD has been disappointing. Although the AUD is traditionally viewed as a high-yield currency and a common target for hot money inflows, a long-term perspective shows that the exchange rate has mostly been consolidating or weakening, with only certain periods experiencing notable rebounds.

Over 35% depreciation in ten years—why is it still difficult to reverse even with rising commodity prices?

Starting from around 1.05 in early 2013, the AUD has depreciated over 35% against the USD by 2023. During the same period, the US dollar index (DXY) rose by 28.35%, and major currencies like the euro, Japanese yen, and Canadian dollar also depreciated against the dollar. This indicates that the AUD’s weakness is not an isolated phenomenon but part of a broader strong dollar cycle.

Even during the COVID-19 pandemic in 2020, Australia’s relatively stable pandemic control and strong demand for commodities like iron ore in Asian markets pushed the AUD/USD up sharply by about 38% within a year. However, this rally was not sustained. Since then, the AUD has mostly remained in consolidation or a weak trend.

By 2025, iron ore and gold prices surged significantly, coupled with the US Federal Reserve’s rate cuts that drove capital flows into risk assets. The AUD/USD briefly rose to 0.6636, appreciating about 5-7% for the year. Yet, from a longer-term perspective, the overall trend of the AUD remains weak.

The key issue is: Whenever the AUD approaches previous high levels, selling pressure increases significantly, reflecting investors’ limited confidence in the currency. Main reasons include:

• US tariff policies impacting global trade, leading to declines in raw material exports (metals, energy), undermining the AUD’s status as a commodity currency
• The persistent interest rate differential between the US and Australia, limiting the AUD’s appeal as a high-yield currency
• Weak domestic economic growth and relatively low asset attractiveness in Australia

Therefore, the AUD currently resembles a “rebound but lacking a trend” currency. Without clear growth momentum or interest rate advantages, the AUD’s exchange rate remains susceptible to external factors rather than driven by its fundamentals.

Three core factors determining the medium- to long-term direction of the AUD

To assess whether the AUD has the potential for sustained appreciation, investors should focus on the interaction of the following three factors:

1. RBA interest rate policy: Can the interest rate differential advantage be re-established?

The AUD has long been regarded as a high-yield currency, with its attractiveness heavily dependent on the interest rate differential with the USD. Currently, the Reserve Bank of Australia (RBA) cash rate is about 3.60%, with market expectations gradually shifting toward “possible rate hikes again by 2026.” The Commonwealth Bank of Australia (CBA) forecasts a potential peak rate of around 3.85%.

If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA could help restore the interest rate advantage for the AUD. Conversely, if rate hikes are not realized, the AUD’s support will weaken significantly.

2. China’s economy and commodity prices: The core driver for the AUD

Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. China’s demand is the most critical variable. When infrastructure and manufacturing activity in China pick up, iron ore prices tend to strengthen in tandem, and the AUD often quickly reflects this change. Conversely, if China’s recovery remains sluggish, even short-term commodity rebounds may lead to the AUD “spiking and then falling back.”

3. US dollar trends and global risk sentiment: Influencing capital flows

From a capital flow perspective, the Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cut environment, a weakening dollar generally benefits risk assets, and the AUD tends to benefit accordingly. However, if risk aversion rises and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are stable.

Recently, market sentiment has slightly improved, but energy prices and global demand remain uncertain. Investors tend to prefer safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

Summary: For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously—RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the US dollar. If only one of these is present, the AUD is more likely to stay within a range rather than trend upward unilaterally.

Divergent views on the AUD’s 2026 outlook—whether the rebound can turn into a trend

The future trajectory of the AUD hinges on whether the recent rebound can evolve into a sustained trend. Market opinions are divided:

Morgan Stanley expects the AUD/USD to rise to around 0.72 by the end of 2025, mainly supported by the RBA’s potential hawkish stance and strengthening commodity prices.

Traders Union’s statistical model projects an average of about 0.6875 (range 0.6738-0.7012) by the end of 2026, rising further to 0.725 by the end of 2027, driven by a strong Australian labor market and a recovery in commodity demand. These optimistic forecasts share the view that if the US economy experiences a soft landing and the dollar index declines, commodity currencies like the AUD will benefit.

UBS adopts a more cautious stance, believing that despite Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with the year-end rate around 0.68.

CBA economists recently expressed a more cautious outlook, suggesting that the AUD’s recovery might be temporary. They forecast the AUD/USD to peak around March 2026 but possibly fall back by year-end. Some Wall Street analysts warn that if the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break through 0.67.

Market participants expect the AUD to fluctuate between 0.68 and 0.70 in the first half of 2026, influenced by Chinese data and US non-farm payrolls. The AUD is unlikely to fall sharply because Australia’s fundamentals remain relatively stable, and the RBA maintains a relatively hawkish stance. However, it also won’t surge to 1.0 due to the persistent structural advantage of the dollar. Short-term pressures mainly stem from Chinese economic data, while long-term positives include resource exports and a commodity cycle recovery.

The commodity nature of the AUD determines its long-term direction

As a resource-exporting country, the AUD’s “commodity currency” attributes remain prominent, especially its high correlation with prices of refined copper, iron ore, coal, and other raw materials.

Market analysis suggests that in the short term, the AUD will be supported by the RBA’s hawkish stance and strong raw material prices. However, in the medium to long term, global economic uncertainties and potential rebounds in the dollar could limit the AUD’s upside and lead to more volatile movements.

Although FX markets are inherently volatile and difficult to predict precisely, the AUD’s high liquidity, strong volatility patterns, and economic structure make medium- to long-term trend analysis relatively manageable. For investors closely monitoring the AUD exchange rate, understanding the interplay among commodity prices, interest rate differentials, and global risk sentiment is crucial.