In-depth analysis of AUD movement: Is it undervalued or continuously weakening?

As the fifth-largest global trading currency, the Australian dollar (AUD) ranks just behind the US dollar, euro, Japanese yen, and British pound in trading activity. This position should make the AUD attractive to investors, but the reality has been quite the opposite—over the past decade, the AUD has performed persistently poorly, depreciating over 35% from the 2013 high of 1.05. So, will the AUD continue to fall? What is the underlying logic?

Why Has the AUD Fallen Into a Long-Term Decline? Three Fundamental Reasons

Suppression by a Strong US Dollar Cycle

This is not an issue unique to the AUD. During the same period, the euro, Japanese yen, and Canadian dollar also depreciated against the US dollar, while the US dollar index (DXY) rose by 28.35%. This indicates that the AUD’s weakness stems from a comprehensive US dollar appreciation cycle. In Q4 2024, the AUD/USD fell by 9.2%, and in early 2025, it briefly hit a five-year low of 0.5933, fueling market concerns about the AUD.

The Double-Edged Sword of Commodity Currency Attributes

Australia’s economy heavily relies on resource exports, with iron ore, coal, copper, and other commodities supporting its economic growth. This naturally makes the AUD a “commodity currency,” tied to global raw material prices. Rising trade tensions, uncertain tariffs, and global trade war escalations have directly hit Australian exports. Falling raw material prices have further worsened the situation, turning the AUD’s commodity currency nature into a burden.

Interest Rate Differentials Reversing and Capital Outflows

The AUD was once a high-yield currency, attracting carry trades. However, the Reserve Bank of Australia (RBA) has adopted a cautious stance amid inflation pressures, with limited room for rate hikes. Meanwhile, the Federal Reserve’s policy uncertainty has prevented the US-Australia interest rate spread from widening. Worse, domestic economic growth in Australia has slowed, reducing asset attractiveness and leading to ongoing foreign capital outflows.

When Will the AUD Bottom Out and Rebound? Key Variables Emerge

Since mid-2025, the market has seen a glimmer of hope. In September, the AUD/USD rose to 0.6636, hitting a new high since November 2024. Three forces underpin this rebound:

First, iron ore and gold prices surged, directly supporting the AUD. Second, expectations of Fed rate cuts increased, risk appetite among investors improved, and capital flowed into emerging markets and commodity currencies. Third, the latest stance of the RBA showed subtle changes—although the rate was held steady at 3.6% in November, improving inflation data suggests room for future policy easing.

However, whether this rally can sustain depends on three core factors:

The Speed of the RBA’s Policy Shift. While inflation has eased, it remains above the RBA’s target range. If inflation continues to be controlled, the central bank may start cutting rates in the first half of next year, providing short-term support for the AUD. But in the long run, narrowing interest rate differentials could be detrimental to the AUD.

The Direction of the US Dollar. The Fed completed its second rate cut of the year in October, but hawkish comments from Powell dampened expectations of further cuts. The US dollar index rebounded from a summer low of 96 to rise about 3% this year, with a rising probability of breaking above the 100 psychological level. Once the dollar confirms its strength, the AUD will inevitably face pressure.

The Certainty of China’s Economic Recovery. This is the most critical variable. Over 40% of Australia’s exports—iron ore and coal—are shipped to China. If China’s economy shows strong recovery, it will significantly boost demand and prices for commodities, directly strengthening the AUD’s fundamentals. Conversely, if China’s recovery slows and the property market remains sluggish, the AUD’s support will weaken markedly.

How Do Major Institutions View the AUD Outlook?

Market opinions on the AUD’s future vary significantly. Morgan Stanley remains optimistic, expecting the AUD/USD to reach 0.72 by the end of the year, based on the RBA’s hawkish stance and commodity price support. UBS is more cautious, believing that global trade uncertainties and policy changes will limit the AUD’s upside, with a target of 0.68.

The most conservative outlook comes from the CBA economists, who see the AUD rebound as temporary. They predict the AUD will peak around March 2026 and then decline again, reasoning that the US economy will eventually outpace other developed economies, allowing the dollar to regain dominance.

The consensus from these perspectives is: the AUD has short-term rebound potential but faces medium- and long-term pressures from US dollar appreciation and global trade risks.

Will the AUD Continue to Fall? Market Performance Across Cycles

Short-term Outlook (1-3 weeks)

Currently, the AUD/USD fluctuates between 0.63 and 0.66, with technicals at a critical juncture. If US employment data is weak and trade negotiations progress, the AUD may test above 0.66. Conversely, strong US GDP data and a hawkish Fed could push it back to 0.63 or lower. Key upcoming data include US non-farm payrolls and Australian CPI, which could increase market volatility.

Medium-term Outlook (1-3 months)

Within this period, the RBA’s policy stance will be the dominant factor. If inflation continues to improve, the RBA may initiate rate cuts first, providing temporary support for the AUD, but rate cuts are generally negative for the currency long-term. Meanwhile, the US dollar’s trajectory remains crucial—if the Fed maintains a hawkish stance and the dollar index stays above 100, the AUD’s rebound will be limited.

Long-term Outlook (3-12 months and beyond)

Whether the AUD can shake off its weakness ultimately depends on Australia’s economic revival. Short-term rebounds do not alter the long-term trend unless two key changes occur: one, a significant acceleration in China’s economy, greatly increasing demand for Australian resources; two, a faster domestic economic growth in Australia, restoring asset attractiveness and reversing capital outflows. Otherwise, the AUD will continue to face pressure from a strengthening dollar and global trade risks.

How Should Traders Respond?

Traders interested in the AUD exchange rate can focus on the following entry points:

1. Technical range trading opportunities. Within the 0.6370-0.6450 range, follow the breakout direction but set strict stop-losses. If the price breaks above 0.6450 resistance and stabilizes above the 200-day moving average at 0.6464, consider light long positions targeting 0.6550-0.6600.

2. Data-driven short-term opportunities. Before and after US GDP, core PCE, and Australian CPI releases, the AUD often experiences sharp volatility. Pre-judging the data results can help capture directional moves.

3. Medium- to long-term positioning. If you believe in the rebound logic—(China’s economic acceleration + faster Fed rate cuts)—consider phased building positions to smooth out volatility over time. But this requires patience and risk tolerance, as corrections could be deep.

Will the AUD keep falling? The answer depends on your cycle and logic. Short-term rebounds are possible, but medium-term uncertainty remains, and long-term reversal requires fundamental changes. The market is waiting for signals of these changes, and traders need to learn how to find structural opportunities amid uncertainty.