Why is the Australian dollar under pressure? Investment opportunities amid exchange rate fluctuations

The Australian dollar is the fifth-largest reserve currency by global trading volume, and the AUD/USD currency pair ranks among the most actively traded pairs worldwide. With ample liquidity and lower transaction costs, it attracts a large number of investors for both short-term and long-term positioning.

The Dual Identity of the AUD: High-Yield Currency and Commodity Currency

The popularity of the Australian dollar stems from its unique identity. First, it is a typical high-yield currency, historically a target for carry trades and hot money chasing interest rate differentials. Second, Australia’s economy heavily depends on exports of bulk commodities such as iron ore, coal, and copper, naturally making the AUD a commodity currency. This means that any fluctuations in global raw material prices can cause significant volatility in the AUD exchange rate.

However, over the past decade, the AUD’s performance has been less than ideal. From a level of 1.05 in early 2013, the AUD/USD has depreciated by over 35% by 2023, while the US dollar index (DXY) increased by 28.35% during the same period. This strong dollar cycle not only impacted the AUD but also affected other major currencies like the euro, yen, and Canadian dollar. From both technical and fundamental perspectives, the AUD remains relatively disadvantaged.

Recent Volatility of the AUD

2020 was a shining year for the AUD. Benefiting from Australia’s effective control of the pandemic, strong demand for its iron ore and other commodities in Asia, and supportive monetary policy from the Reserve Bank of Australia (RBA), the AUD/USD surged by 38% that year.

But the good times didn’t last. In the fourth quarter of 2024, the AUD’s performance sharply reversed, with a full-year decline of about 9.2%. By early 2025, worsening global trade tensions and rising recession expectations pushed the AUD/USD down to 0.5933, a five-year low. Analysts point out that US tariff policies have suppressed global trade, and raw material exports have been cold-shouldered, diminishing the AUD’s status as a commodity currency. Meanwhile, the interest rate differential between Australia and the US continues to narrow, and domestic economic weakness has led to reduced asset attractiveness, prompting large capital outflows from Australia.

Can the AUD Break Out of Its Dilemma?

In the second half of the year, the AUD has a chance for a rebound. With iron ore and gold prices rising sharply, coupled with market expectations of Fed rate cuts, risk appetite has improved, and the AUD has followed suit. In early September, the AUD/USD briefly rose to 0.6636, the highest since November 2024. Although there has been some correction in the past two months, it has remained above 0.64.

To determine whether the AUD can continue to strengthen, three core factors should be monitored:

Australia’s Domestic Economy and Monetary Policy Outlook

In Q3 2025, Australia’s CPI rose by 1.3% month-over-month, well above the previous quarter’s 0.7% and market expectations. The RBA repeatedly emphasized that core inflation pressures in housing and services sectors are stubborn, and further easing will only be considered once inflation enters a sustainable downward trajectory. The market generally believes that the likelihood of a rate cut at the November meeting has significantly decreased. The diminished expectation of easing may, in the short term, support the AUD, making it more attractive relative to currencies with ongoing rate cuts.

Strength and Weakness of the US Dollar

The Fed cut the federal funds rate by 25 basis points in October, marking the second rate cut of the year, and announced plans to start balance sheet reduction in December. However, subsequent comments from Chair Powell dampened expectations of further rate cuts in December. Despite ongoing discussions about dollar devaluation and de-dollarization, the DXY rebounded about 3% from its summer lows near 96, with increasing chances of breaking above the key psychological level of 100. Generally, a strong dollar correlates with a weaker AUD, and the two tend to move inversely.

The Strength of China’s Economic Recovery

Australia’s economy is highly dependent on resource exports, with China being its largest buyer. The strength or weakness of China’s economy directly influences its absorption capacity for key raw materials like iron ore, coal, and natural gas, serving as an important support for the AUD. A robust recovery in China would significantly boost resource exports and prices, enhancing market confidence in Australian assets. Conversely, slowing Chinese growth and persistent real estate downturns could dampen raw material demand, weakening the AUD further.

Divergent Views Among Major Institutions on the AUD Outlook

Financial institutions hold differing views on the AUD’s future. Morgan Stanley is relatively optimistic, expecting the AUD/USD to rise to 0.72 by the end of 2025, supported by the RBA’s potential hawkish stance and rising commodity prices. UBS is more cautious, believing that despite Australia’s resilience, global trade uncertainties and Fed policy shifts could limit gains, projecting a year-end rate around 0.68. CBA economists warn that the AUD’s recovery may be short-lived, expecting it to peak around March 2026 and then decline again by year-end.

Outlook for the AUD/MYR Exchange Rate

The AUD/MYR pair is also influenced by multiple factors. Malaysia’s economy relies on exports and raw materials, with the ringgit sensitive to commodity prices. Stable global demand favors the ringgit. Meanwhile, Australia’s economic weakness may limit the AUD’s rebound potential. On monetary policy, Malaysia’s central bank is relatively cautious and may maintain or tighten policy, and if the interest rate differential widens, the ringgit could strengthen. Under current global economic uncertainties, the AUD/MYR may fluctuate within the 3.0-3.15 range, with potential downside testing near 3.0 if Australia’s economic data weaken further.

Short, Medium, and Long-Term Investment Strategies

Short-term Strategy (1-3 days)

Long entry conditions: AUD/USD breaks above 0.6450 resistance. If it stabilizes above this level, consider a small long position targeting the 200-day moving average at 0.6464, with further targets at the psychological 0.6500 level. Trigger factors include weaker-than-expected US GDP or non-farm payroll data (implying increased likelihood of Fed rate cuts) or hotter-than-expected Australian CPI. Stop-loss at below 0.6420.

Short entry conditions: AUD/USD falls below 0.6373 support (10-day EMA). Short positions can target 0.6336 (recent low) or even 0.6300. Trigger factors include strong US data or a significant cooling of Australian CPI. Stop-loss above 0.6400.

Exercise caution before data releases, reduce positions or exit to observe market reactions.

Medium-term Strategy (1-3 weeks)

Bullish scenario: Weak US employment data, declining inflation, combined with easing trade tensions, could benefit the AUD from improved risk sentiment, targeting 0.6550-0.6600. A technical breakout above the 200-day moving average (0.6464) could be a signal to add to long positions. Risks include a resurgence of Australian inflation forcing hawkish policy, unexpected US dollar strength, or geopolitical events triggering safe-haven flows.

Bearish scenario: Strong US economic data, with robust GDP and non-farm figures, could delay Fed rate cuts, leading to a rebound in the dollar and a decline in the AUD to around 0.6250 (year-to-date lows). Escalating trade conflicts, weaker Australian trade data, or soft Chinese economic indicators could further weaken the AUD.

Long-term Holding Strategy

If bullish on the AUD’s long-term prospects, consider accumulating in phases at current lows, smoothing out market volatility over time, especially after confirming an uptrend.

Overall Investment Considerations

Currently, the AUD/USD is in a phase of technical oscillation and fundamental debate. In the short term, focus on range trading (0.6370-0.6450), and follow the breakout trend. The medium to long-term direction depends on the timing of Fed policy shifts and whether global trade risks ease. If data this week reinforce expectations of rate cuts, consider building long positions; otherwise, remain cautious of a potential dollar rebound.

It is important to remember that currency trading involves risks. Investors should closely monitor market sentiment following data releases, adjust trading strategies flexibly, and be fully aware of the high risk associated with forex investments.