The truth behind the recent sustained pressure on the Australian dollar: supply and demand imbalance or cyclical rotation? Analysis of the AUD exchange rate outlook

As the fifth-largest trading currency globally, every move of the Australian dollar (AUD) affects investors’ nerves. However, compared to its trading volume activity, the AUD’s performance over the past decade has been somewhat underwhelming.

From an initial 1.05 in early 2013 to the current level, the AUD has depreciated over 35% against the USD. During the same period, the US dollar index rose by 28.35%, and other major currencies such as the euro, yen, and Canadian dollar also depreciated against the dollar. This is not just an AUD issue but reflects a persistent strong dollar cycle profoundly impacting the global foreign exchange landscape.

The Fate of Commodity Currencies: Why is the AUD “Overlooked”?

Understanding the AUD’s movement requires understanding its identity — a commodity currency.

Australia’s economy is highly dependent on exports of bulk commodities like iron ore, coal, copper, and natural gas. This means that fluctuations in global raw material prices directly influence the AUD exchange rate. When commodity prices rise, the AUD tends to strengthen; when demand wanes, the AUD loses value.

However, over the past ten years, despite Australia’s pandemic-era resilience due to effective containment measures and strong Asian demand for commodities, with the AUD soaring by 38% in 2020, this strength was not sustained. Entering Q4 2024, the AUD has sharply fallen against the USD, with an approximate annual decline of 9.2%.

What are the reasons?

Diminished Interest Rate Differentials: As a high-yield currency, the AUD was once favored for arbitrage trades. But as the interest rate gap between Australia and the US narrows, this advantage has significantly diminished.

Impact of US Tariff Policies: Trump’s policies increased global trade uncertainty, directly dampening Australia’s export outlook. In early 2025, the AUD briefly fell to 0.5933, a five-year low.

Weak Economic Fundamentals: Domestic consumption growth in Australia is sluggish, economic growth has slowed, and capital outflows have become routine.

Can the AUD Regain Its Vitality? Three Key Factors Determine the Direction

Facing current difficulties, many investors ask: Will the AUD bounce back?

The answer depends on three core variables:

Factor 1: The Reserve Bank of Australia’s (RBA) Policy Stance

In Q3 2025, Australia’s inflation rose by 1.3% month-over-month, surpassing the previous quarter’s 0.7% and exceeding market expectations. The RBA has recently emphasized that inflation pressures from housing construction and services are more stubborn than anticipated. This directly affects the possibility of rate cuts — markets had been optimistic about a rate cut in November, but this expectation has cooled significantly.

Contrarian thinking: Diminished easing expectations usually short-term benefits the AUD, as it appears more attractive relative to other currencies expected to cut rates (like the USD). But in the long run, if Australia’s economy remains weak, rate cuts will eventually be necessary.

Factor 2: The US Dollar’s Strength Cycle

The Federal Reserve cut the federal funds rate to 3.75%-4.00% in October, but Chairman Powell’s subsequent comments dampened market enthusiasm for further rate cuts. The US dollar index rebounded about 3% from its mid-year low of 96, and breaking the psychological 100 level is increasingly likely.

The rule is simple: When the dollar is strong, the AUD tends to weaken, as they often have an inverse relationship. The current resilience of the USD exceeds expectations, exerting ongoing pressure on the AUD.

Factor 3: The Strength of China’s Economic Recovery

China is the largest buyer of Australia’s resource exports. The health of China’s economy directly influences its absorption of Australian iron ore, coal, natural gas, and other raw materials.

When China’s economy shows a strong recovery, demand for Australian commodities surges, providing robust support for the AUD. Conversely, if China’s real estate sector remains sluggish and economic growth slows, the AUD loses an essential demand foundation.

Diverging Views Among Financial Institutions: How High Could the AUD Rise by Year-End?

Regarding the AUD’s future trajectory, Wall Street’s opinions vary:

• Morgan Stanley Bullish: expects the AUD to rise to 0.72 by year-end, supported by the RBA’s hawkish stance and commodity prices
• UBS Cautious: believes global trade uncertainties and Fed policy shifts will limit the AUD’s gains, projecting around 0.68
• CBA Economists Most Conservative: see the AUD recovery as potentially short-lived, with a high point around March 2026, followed by possible declines

This divergence reflects the high uncertainty surrounding the AUD’s movement — no single variable can determine everything.

AUD/USD and RMB Outlook: New Investment Opportunities

Besides the common AUD/USD pair, AUD/RMB also warrants attention.

The AUD/RMB chart shows that this exchange rate closely follows AUDUSD, but its volatility is slightly smaller due to the relative stability of the RMB.

Key influencing factors:

• Australia-China trade stability: stable trade relations favor the AUD
• RMB policy expectations: China’s central bank liquidity injections directly impact the RMB’s direction
• Economic data comparison: Australia’s sluggishness versus China’s recovery, with the RMB relatively strengthening

Short-term forecast: AUD/RMB is expected to fluctuate between 4.6-4.75. If China’s economy faces pressure, the RMB may weaken briefly, pushing the pair toward 4.8.

AUD/MYR: A Regional Economic Perspective

Malaysia, as Southeast Asia’s economic hub, also sees the Ringgit’s performance being sensitive to commodity prices. The AUD/MYR pair is expected to fluctuate between 3.0-3.15 amid global economic uncertainties.

If Australia’s economic data further weaken, the pair could test support near 3.0.

How to Find Trading Opportunities Amid AUD Fluctuations

The volatility of the AUD makes it a popular target for forex trading. Investors can participate through:

Long and short trading: profit from both appreciation and depreciation of the AUD.

Leverage amplification: use leverage ratios of 1-200x to control larger positions with smaller capital.

Low entry barriers: low minimum deposits make it suitable for small and medium investors to experience forex trading.

Short-, Medium-, and Long-term Trading Strategies for the AUD

Short-term trading (1-3 days): Range Breakout

Long entry trigger: AUD/USD breaks above 0.6450 resistance, targeting 0.6464 (200-day moving average) and then the psychological 0.6500 level. Catalysts include weaker US GDP/non-farm data or unexpectedly strong Australian CPI. Stop-loss at 0.6420.

Short entry trigger: Falls below 0.6373 support (10-day EMA), targeting 0.6336 to 0.6300. Catalysts include strong US data or a significant cooling of Australian CPI. Stop-loss at 0.6400.

Caution: Hold off before data releases, reduce positions, or exit temporarily to avoid amplified volatility.

Medium-term strategy (1-3 weeks): Trend Following

Bullish scenario: US Fed signals rate cuts, trade tensions ease, risk sentiment improves, targeting 0.6550-0.6600. Confirmed by a breakout above the 200-day moving average (0.6464).

Bearish scenario: US economy outperforms expectations, Fed delays rate cuts, USD rebounds, and AUD drops to 0.6250. Escalating trade tensions or weak Chinese data can also weigh on the AUD.

Long-term holding strategy: Dollar-cost averaging

Investors optimistic about the AUD long-term can build positions gradually at current lows, smoothing out market volatility over time, especially after confirming an uptrend.

Summary and Investment Insights

Currently, the AUD/USD is at a crossroads of technical oscillation and fundamental debate. Short-term trading should focus on range (0.6370-0.6450), with breakout follow-through. The medium- and long-term direction depends on Fed policy signals and whether global trade risks ease.

Investors should closely monitor:

1. Australian CPI trends: inflation decline influences RBA rate cut pace
2. US economic data: direct indicator of USD strength
3. China’s economic recovery: a barometer for the AUD’s commodity nature
4. Geopolitical risks: trade tensions escalation risks

Risk warning: All investments involve risks. Forex trading is high-risk, and investors may face total capital loss. It is recommended to develop trading plans aligned with personal risk tolerance.