Analysis of the Weakening of the Australian Dollar: The Three Major Drivers Affecting Future Exchange Rate Performance

The Australian dollar, as the fifth-largest reserve currency by global trading volume (ranked after the US dollar, euro, yen, and British pound), AUD/USD currency pair is highly liquid and has tight spreads in the global forex market. It has always been a preferred instrument for short- to medium-term trading and long-term position allocation. Notably, the AUD has long been positioned as a high-yield currency, playing an important role in carry trades and hot money rotations. However, based on the actual performance over the past decade, the overall trend of the AUD has shown a weakening pattern, with only certain cycles experiencing significant rebounds.

Why has the AUD been consistently weak over the past ten years?

The year 2020, during the COVID-19 outbreak, was a bright spot for the AUD—at that time, Australia managed to control the pandemic relatively well, demand for commodities like iron ore in Asia was strong, and the Reserve Bank of Australia (RBA) adjusted its policies, jointly pushing the AUD/USD to appreciate about 38% within a year. Since then, however, the AUD has mostly traded sideways or on a downward trajectory.

By 2025, with iron ore and gold prices rebounding, and the Federal Reserve entering a rate-cutting cycle, capital flowed into risk assets, causing the AUD to fluctuate higher, briefly reaching 0.6636, with an annual gain of about 5-7%. But when viewed over a longer timeframe, the weak trend remains prominent.

Using early 2013’s 1.05 as a baseline, the AUD/USD has depreciated over 35% in the past decade (2013-2023), while the US dollar index (DXY) increased by 28.35%. In comparison, other major currencies like the euro, yen, and CAD also showed depreciation against the dollar, reflecting a prolonged strong dollar cycle globally. From both technical and fundamental perspectives, the AUD is in a relatively unfavorable environment, which explains why even potential rebounds struggle to establish a firm footing at high levels.

Core driving factors of the AUD currency pair during different periods

Why does the AUD remain weak despite rising commodity prices and a weakening dollar?

Whenever the AUD approaches previous highs, selling pressure increases, indicating market confidence in the AUD remains limited. The main reasons include:

1. Deterioration of external trade environment — US tariffs and trade policies have impacted global trade, with raw material exports (metals, energy) facing downward pressure, directly weakening the commodity currency support.

2. Diminishing interest rate advantage — The interest rate differential between the US and Australia is difficult to reverse, reducing the attractiveness for carry trade investors.

3. Domestic economic resilience is insufficient — Australia’s economic growth momentum is weak, and the attractiveness of assets to foreign investors is relatively low.

From a medium- to long-term perspective, the AUD’s current characteristics resemble a “rebound but lacking a clear trend.” Without strong growth drivers or interest rate advantages, the AUD’s movements are more influenced by external factors rather than its own economic fundamentals. This is the core reason for market caution toward the AUD.

Three key factors to observe for future AUD trend direction

To grasp the medium- to long-term bullish or bearish shifts, investors should focus on the following three elements:

1. RBA’s monetary policy stance

The attractiveness of the AUD heavily depends on the interest rate differential. Currently, the RBA’s cash rate is about 3.60%, with market expectations of another rate hike in 2026, and the Reserve Bank of Australia (RBA) forecasts a peak around 3.85%.

If inflation persists and the labor market remains resilient, a hawkish RBA stance will help restore the AUD’s interest rate advantage; conversely, if rate hikes do not materialize as expected, the AUD’s support will weaken.

2. China’s economic momentum and commodity prices

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 China’s infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen simultaneously, and the AUD often reflects this quickly in the exchange rate; if China’s recovery remains weak, even short-term commodity rebounds may lead to “spikes followed by declines” in the AUD.

3. USD trend and global risk appetite shifts

From a capital flow perspective, the Fed’s policy cycle remains a core variable in the global FX market. During rate-cutting periods, a weaker dollar generally benefits risk currencies, including the AUD; but if risk aversion rises and capital flows back into USD, the AUD may face downside pressure even if fundamentals are stable.

Although recent market sentiment has slightly improved, signs of soft energy prices and weak demand persist. Investors tend to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

Achieving a genuine medium- to long-term bullish trend for the AUD requires three conditions simultaneously: a hawkish turn by the RBA, substantial improvement in Chinese demand, and a structural weakening of the USD. If only one condition is met, the AUD is more likely to remain in a range-bound pattern rather than trend upward unilaterally.

Outlook and analysis for AUD in 2026 and beyond

The core concern for the AUD’s future is whether the “rebound can evolve into a trend.” Most market analysts agree that: while the AUD has short-term recovery potential, returning to a strong bullish phase still requires more favorable macro conditions.

Different institutions’ forecasts for the AUD’s future diverge significantly:

Optimistic outlook — Morgan Stanley projects the AUD/USD could rise to 0.72 by the end of 2025, supported by the RBA’s hawkish stance and commodity price expectations.

Traders Union’s models suggest an average of about 0.6875 by the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, emphasizing the importance of Australia’s labor market resilience and commodity demand recovery.

The common logic behind these optimistic forecasts is: if the US economy achieves a soft landing and the dollar index declines, it will favor the performance of commodity currencies like the AUD.

Pessimistic outlook — UBS adopts a more cautious view, noting that despite Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with a forecast near 0.68 by year-end.

The latest reports from Australian economists suggest that the AUD’s recovery might be temporary, predicting a peak around March 2026, followed by a possible decline by year-end.

Some Wall Street analysts warn that if the US avoids recession but the dollar remains strong due to interest rate differentials, the AUD will struggle to break above 0.67.

Practical judgment — In the first half of 2026, the AUD is likely to fluctuate within 0.68-0.70, mainly influenced by Chinese economic data and US non-farm payroll reports. The AUD is unlikely to fall sharply because Australia’s fundamentals remain solid and the RBA remains relatively hawkish, but it also won’t surge to 1.0, as the structural advantage of the USD persists. Short-term pressures mainly stem from China’s data, while long-term bullish factors include resource exports and commodity cycle recovery.

Summary of future AUD outlook

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

Market analysis suggests that in the short term, the RBA’s hawkish stance and strong commodity prices will provide support; however, in the medium to long term, global economic uncertainties and potential USD rebounds will limit the AUD’s appreciation, leading to more volatile movements.

Although forex markets are highly volatile and difficult to predict precisely, the AUD’s high liquidity, strong volatility patterns, and distinctive economic structure make medium- to long-term trend assessment more approachable. For investors focusing on AUD future trend 2023 and beyond, understanding these core drivers will help better seize trading opportunities.