The truth behind the Australian dollar's continued weakness: commodity cycles and the US dollar pattern determine everything

AUD, as one of the top five major currencies by global trading volume, is highly liquid with low spreads. Theoretically, it should attract substantial capital inflows. However, the past decade’s performance has been disappointing—AUD/USD has depreciated from the 1.05 level in early 2013 to today, with a total decline of over 35%. What exactly has happened behind this?

The Fundamental Logic Behind AUD’s Decline: Supercycle of the US Dollar vs Commodity Demand Deterioration

To understand why AUD has been under long-term pressure, we need to look at the macro landscape. During the same period, the US Dollar Index (DXY) rose by 28.35%, while the euro, yen, and Canadian dollar also depreciated against the dollar—indicating that AUD’s weakness is not an isolated phenomenon but a natural result of the global shift into a “Strong Dollar Cycle.”

Essentially, AUD is a commodity currency, highly sensitive to China’s economy and commodity prices. When China’s economic momentum slows and global trade faces pressure, Australia’s export advantages (iron ore, coal, energy) weaken accordingly, making it difficult for AUD to find fundamental support. US tariffs on imports and a decline in global raw material exports further diminish AUD’s commodity currency characteristics.

Even more, the “high-yield currency” halo is fading. The interest rate differential trade was once a key factor attracting capital to AUD, but as US interest rates remain high and the Reserve Bank of Australia (RBA) faces easing expectations, the US-Australia interest rate gap narrows, causing AUD to lose its previous appeal.

AUD Rebound Fireworks: Lessons from 2020 and 2025

It’s not that AUD has no bright spots. During the COVID-19 pandemic in 2020, Australia managed the outbreak relatively well, Asian demand for raw materials was strong, and central bank policies were accommodative. As a result, AUD/USD surged 38% within a year. By the first half of 2025, iron ore and gold prices soared, and the Federal Reserve’s rate cuts boosted risk assets, leading AUD to rise another 5-7%, approaching 0.6636 at one point.

However, these rebounds did not fundamentally change AUD’s long-term weakness. Every time AUD approached previous highs, selling pressure emerged—market confidence in AUD remains limited. Short-term rebounds are easy, but forming a sustained upward trend requires more solid fundamental support.

Three Major Variables Determining AUD’s Future

Investors aiming to grasp the turning points of AUD need to closely monitor three core factors:

First: RBA’s Monetary Policy Stance

The RBA’s cash rate is about 3.60%. Market expectations suggest possible rate hikes again in 2026, with some institutions predicting a peak around 3.85%. If inflation remains sticky and the labor market stays resilient, a hawkish stance from the RBA could help AUD rebuild its interest rate advantage; otherwise, AUD’s support will weaken significantly.

Second: China’s Economy and Commodity Cycle

Australia’s export structure is highly concentrated in iron ore, coal, and energy, with China being the key variable. When China’s infrastructure and manufacturing activity rebound, commodity prices tend to strengthen quickly, and AUD usually reacts swiftly; but if China’s recovery momentum falters, even a short-term commodity rally may see AUD “spike and fall.”

Third: US Dollar Cycle and Global Risk Sentiment

The Federal Reserve’s policy direction still dominates the global FX market. In a rate-cut environment, a weaker dollar generally benefits risk currencies like AUD; but when risk aversion rises and capital flows back into USD, AUD can come under pressure even if fundamentals haven’t worsened. Recently, with weak global demand and uncertain energy prices, investors tend to avoid risk-sensitive currencies like AUD.

For AUD to achieve a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA reaffirms a hawkish stance, China’s demand substantively improves, and the US dollar enters a structural depreciation phase. Meeting only one or two of these conditions will likely keep AUD in a range-bound oscillation, making a unilateral rally difficult.

Outlook for AUD in 2026-2027: Optimists vs Cautious Views

Market forecasts for AUD’s future diverge significantly:

Morgan Stanley expects AUD/USD to rise to 0.72 by the end of 2025, assuming the RBA remains hawkish and commodity prices stay strong. Traders Union’s model is more optimistic, projecting an average of 0.6875 (range 0.6738-0.7012) by the end of 2026, and further rising to 0.725 by 2027, emphasizing Australia’s resilient labor market and commodity demand recovery.

UBS, however, adopts a cautious stance, believing that global trade uncertainties and Fed policy changes could limit AUD’s upside, with the exchange rate remaining around 0.68 by year-end. Economists at the Commonwealth Bank of Australia are more conservative, predicting AUD may hit a short-term high around March 2026 before falling back. Some Wall Street analysts warn that if the US avoids recession but the dollar remains strong (due to interest rate advantages), AUD will struggle to break through 0.67 effectively.

Overall, in the first half of 2026, AUD is likely to fluctuate within 0.68-0.70, influenced by Chinese data and US non-farm payroll figures. A sharp collapse seems unlikely (given Australia’s solid fundamentals and relatively hawkish RBA), but a significant rally also appears difficult (as the structural US dollar advantage persists). Short-term risks mainly stem from weaker-than-expected Chinese data, while medium- to long-term positives come from resource exports and commodity cycle recovery.

How Ordinary Investors Can Participate in AUD Trading

AUD/USD is one of the five most active forex pairs globally. Its distinctive features and high liquidity make it relatively easy to analyze trends. Investors can participate through forex margin trading, supporting both long and short positions, with leverage options from 1-200x. The low trading threshold makes it suitable for small and medium investors to deploy flexibly.

It is important to note that forex trading is high-risk; investors may face the risk of losing all their capital. Make sure to fully understand the risks before making decisions.

Final Reminder for AUD Investment

The medium- to long-term trend of AUD is relatively straightforward to assess because of its high correlation and regularity with commodity prices, China’s economy, and RBA policies. However, the forex market is volatile and short-term exchange rate forecasts are inherently difficult, with most quantitative models having limited effectiveness in the short run.

Investors should adopt a long-term perspective, focusing on whether the commodity cycle truly initiates, whether China’s demand substantively improves, and whether the US supercycle begins to reverse—these three factors will determine whether AUD can break free from years of stagnation and re-enter an upward trajectory.