When will the Australian dollar truly rebound? 2026 exchange rate outlook and investment strategy analysis

AUDUSD, as one of the top five currency pairs with the largest global trading volume, has always been a focus of investor attention. However, over the past decade, the Australian dollar has generally shown a weak trend. Although it rebounded in the first half of 2025 driven by rising commodity prices and a weakening US dollar, reaching a high of 0.6636, with an annual increase of about 5-7%, from a longer-term perspective, the AUD still faces structural challenges.

Deep Roots of the AUD’s Decade-Long Weakness: Comprehensive Pressure Under a Strong Dollar Cycle

From the early 2013 level of 1.05, the AUD has depreciated by over 35% in the past ten years, while the US Dollar Index (DXY) has risen by 28.35%. This is not only an AUD issue; major currencies like the euro, yen, and CAD have also weakened against the dollar, reflecting a global dominant cycle of a strong dollar.

The main causes of the AUD’s weakness include three aspects:

First, weak commodity demand undermines its commodity currency attribute. Australia’s export structure is highly concentrated in iron ore, coal, and energy, with economic growth closely linked to commodity prices. When China’s economic growth slows and infrastructure investment declines, demand for Australian raw materials drops, directly impacting the AUD.

Second, the interest rate differential advantage is gradually diminishing. The AUD was once considered a high-yield currency, but as the policy divergence between the Reserve Bank of Australia (RBA) and the Federal Reserve narrows, the attractiveness of interest rate spreads has significantly decreased. When the high-yield advantage disappears, the support from hot money and arbitrage trading weakens.

Third, US tariff policies affect global trade. Declines in raw material exports, coupled with sluggish domestic economic conditions, further reduce Australia’s asset attractiveness, weakening the AUD’s commodity currency status.

Every time the AUD approaches previous highs, market selling pressure increases, indicating limited confidence in the currency. This fully reflects that the AUD currently resembles a “rebound but lacking a trend” currency, easily influenced by external factors rather than its fundamentals.

Three Key Factors Determining the AUD’s Trend

For the AUD to break out of a genuine medium- to long-term bullish trend, three conditions must be met simultaneously:

1. RBA Monetary Policy: Can the interest differential be rebuilt?

The RBA’s cash rate is currently about 3.60%. Market expectations suggest a possible rate hike again in 2026. Commonwealth Bank of Australia (CBA) forecasts the peak rate could reach 3.85%. If inflation remains sticky and the employment market remains resilient, a hawkish stance from the RBA will help rebuild the AUD’s interest advantage; otherwise, 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

The AUD’s movement is highly correlated with Chinese demand. When China’s infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen simultaneously, often leading to a rapid appreciation of the AUD. Conversely, if China’s recovery remains weak, even short-term rebounds in commodities may lead to a “spike and fall” pattern in the AUD.

3. US dollar trend and global risk sentiment

The Fed’s policy cycle remains a core driver of the global FX market. In a rate-cut environment, a weaker dollar usually benefits risk assets and commodity currencies like the AUD. However, if risk aversion rises and capital flows back into the dollar, the AUD may face pressure even if its fundamentals are stable. Currently, energy prices and global demand remain cautious, and investors tend to favor safe-haven assets rather than cyclical currencies, limiting the AUD’s upside potential.

AUD Outlook for 2026: Optimism and Caution in Play

Market views on the AUD’s future are mixed. Morgan Stanley expects the AUD could rise to 0.72 by the end of 2025, supported by the RBA’s potential hawkish stance and strengthening commodity prices.

The Traders Union’s statistical model projects an average forecast of about 0.6875 for the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, emphasizing strong Australian labor markets and a recovery in commodity demand. These optimistic forecasts share a common basis: if the US economy soft-lands and the dollar index declines, it will favor commodity currencies like the AUD.

However, UBS holds a more conservative view, believing that despite Australia’s resilient economy, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with the exchange rate expected to stay around 0.68 by year-end.

CBA economists suggest a more cautious outlook, predicting that the AUD’s recovery may be short-lived. They forecast the AUD/USD exchange rate will peak around March 2026 but may fall back again by year-end. Some Wall Street analysts also warn that if the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break through 0.67 resistance.

Personally, I believe the AUD will not collapse sharply because Australia’s fundamentals are solid and the RBA remains relatively hawkish; however, it’s unlikely to surge to 1.0. The structural advantage of the dollar still exists. In the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, influenced by Chinese data and US non-farm payrolls. Short-term pressures stem from China’s economic data, while long-term positives come from Australia’s resource exports and commodity cycles.

Investment Insights on the AUD’s Trend

The AUD features high liquidity and strong volatility patterns, combined with its distinct economic structure, making medium- to long-term trend analysis relatively straightforward. As a commodity-exporting “commodity currency,” the AUD is highly correlated with prices of copper, iron ore, coal, and other raw materials.

Overall market analysis suggests that in the short term, the hawkish stance of the RBA and strong commodity prices will provide support; but in the medium to long term, global economic uncertainties and potential dollar rebounds will limit the AUD’s upside and lead to more volatile movements.

Although FX markets are inherently volatile and predicting exchange rates is challenging, the AUD’s liquidity and economic structure make analysis somewhat easier for investors. For those monitoring the AUD, key factors include the RBA’s policy moves, Chinese economic data, and global risk sentiment, which are crucial for capturing the currency’s trajectory.