Can the Australian dollar trend reverse a decade of decline? 2026 Exchange Rate Outlook and Investment Key

Why Has the AUD Fallen into a Long-Term Weakness? The Truth Behind a Over 35% Depreciation Over Ten Years

As the fifth most traded currency globally (ranking: USD, EUR, JPY, GBP, AUD), the AUD/USD currency pair is also the fifth most actively traded pair worldwide. Its high liquidity and low spreads should have made the AUD perform remarkably well, but reality has been quite different.

The overall weakness of the AUD over the past decade is a hidden concern. From a level of 1.05 in early 2013, the AUD/USD has fallen over 35% by 2023, while the US Dollar Index (DXY) increased by 28.35% during the same period. In comparison, the EUR, JPY, and CAD against the USD have also depreciated, fundamentally driven by a global strong dollar cycle.

Although the AUD surged approximately 38% during the COVID-19 pandemic in 2020 due to Australia’s relatively stable pandemic control and strong demand for commodities like iron ore in Asia, most of the time since then, the AUD has remained in consolidation or a weak trend. In 2025, driven by rising iron ore and gold prices and the Federal Reserve cutting interest rates, the AUD rose to 0.6636, appreciating about 5–7% against the USD overall. However, on a longer-term scale, the trend remains biased toward weakness.

The Three Major Obstacles to the AUD’s Movement: Why Is a Rebound Difficult to Turn Into a Trend?

Whenever the AUD approaches previous highs, market selling pressure clearly increases. Confidence in the AUD remains limited, mainly due to:

1. US Tariffs Impacting Raw Material Exports: US tariff policies affect global trade, leading to declines in Australia’s metal, energy, and other raw material exports, directly undermining the AUD’s status as a commodity currency.

2. Loss of Interest Rate Advantage: The interest rate differential between the Reserve Bank of Australia (RBA) and the Federal Reserve remains difficult to reverse. The RBA’s cash rate is about 3.60%, with market expectations of a possible rate hike again by 2026, and the Commonwealth Bank of Australia (CBA) forecasts a peak around 3.85%.

3. Domestic Economic Attractiveness Diminishing: Australia’s domestic economic recovery lacks momentum, resulting in relatively low asset attractiveness and further reducing foreign capital inflows.

From a medium- to long-term perspective, the AUD resembles a “rebound but no trend” currency. Without clear growth drivers and interest rate advantages, the AUD’s movement is more susceptible to external factors rather than its fundamentals.

Three Key Factors to Monitor for the AUD’s Movement

To accurately judge the AUD’s bullish or bearish turning points, investors must focus on the following three core indicators:

1. RBA Interest Rate Policy: Can the interest rate advantage be restored?

The AUD has long been regarded as a high-yield currency, with its attractiveness highly dependent on the interest rate differential between the RBA and the Fed. Currently, the RBA cash rate is about 3.60%, and the market is gradually shifting expectations toward “another rate hike possible by 2026,” with the Commonwealth Bank of Australia (CBA) predicting a peak around 3.85%.

If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA will help rebuild the AUD’s interest rate advantage; conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly.

2. China’s Economy and Commodity Prices: External Drivers 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 China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen simultaneously, and the AUD usually reflects this quickly in the exchange rate. Conversely, if China’s recovery lacks momentum, even short-term commodity rebounds may lead to “spikes followed by declines” in the AUD.

3. US Dollar Trends and Global Risk Sentiment: Determining Capital Flows

From a capital 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 currencies like the AUD; but if risk aversion rises and capital flows back into the dollar, the AUD may weaken even if its fundamentals are stable.

Recent energy prices and global demand remain subdued, leading investors to prefer safe-haven assets over cyclical currencies, limiting the AUD’s upside potential.

For the AUD to enter a genuine medium- to long-term bull phase, three conditions must be met simultaneously: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the US dollar. If only one condition is met, the AUD is more likely to stay in a range rather than trend upward.

AUD Outlook: Exchange Rate Forecasts for 2026 and Beyond

The key to the AUD’s future trend is whether the “rebound can turn into a trend.” Most market analysts agree that the AUD has room for short-term recovery, but returning to a strong bull phase requires clearer macro conditions.

Different institutions have varying views on the AUD’s trajectory:

Morgan Stanley projects the AUD/USD could rise to 0.72 by the end of 2025. This forecast is mainly based on the possibility of the RBA maintaining a hawkish stance and a rally in commodities.

Traders Union’s model estimates 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, emphasizing Australia’s strong labor market and commodity demand recovery.

UBS adopts a more conservative view, believing that despite Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit upside, with the AUD expected to stay around 0.68 by year-end.

The Commonwealth Bank of Australia (CBA) recently expressed a cautious outlook, suggesting the AUD’s recovery might be temporary. They forecast the AUD/USD to peak around March 2026 but possibly fall again by the end of 2026.

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 resistance at 0.67.

From a personal perspective, in the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese data and US non-farm payroll fluctuations. The AUD won’t crash because of Australia’s solid fundamentals and the RBA’s relatively hawkish stance, but it also won’t surge to 1.0 due to structural US dollar advantages. Short-term pressures mainly stem from Chinese data, while long-term positives include resource exports and commodity cycles.

Final Judgment on the AUD’s Trend

As a commodity-exporting “commodity currency,” the AUD’s attribute remains prominent, with high correlation to prices of raw materials like copper, iron ore, and coal.

In the short term, the RBA’s hawkish stance and strong raw material prices will support the AUD; in the medium to long term, attention should be paid to global economic uncertainties and potential rebounds in the dollar, which 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 cyclical patterns, and its economic structure make its medium- to long-term trend relatively easier to grasp. The key remains closely monitoring RBA policies, Chinese economic data, and the structural direction of the US dollar.