## Why Is the AUD Still Weak During a Rate Hike Cycle? Future Exchange Rate Trend Analysis

The Australian dollar is the fifth most traded currency globally, and the AUD/USD currency pair is one of the most active trading targets worldwide. As a typical commodity currency, the AUD often moves in tandem with commodity prices. However, over the past decade, despite the AUD being highly regarded as a high-yield currency, its actual performance has consistently disappointed investors.

Since reaching a high of 1.05 in early 2013, the AUD has depreciated by over 35% against the USD in the past ten years, while the US dollar index has risen by 28.35%. In comparison, other major currencies such as the euro, yen, and Canadian dollar have also shown weak performance against the dollar, reflecting a prolonged strong dollar cycle rather than an issue unique to the AUD.

## Three Fundamental Reasons for the AUD’s Continued Weakness

**Structural Changes in Commodity Demand**

Australia’s export structure is heavily reliant on raw materials like iron ore, coal, and energy. In recent years, China’s economic slowdown, coupled with the impact of US tariffs on global trade, has directly weakened Australia’s commodity export appeal. When international commodity prices come under pressure, the support for the AUD as a commodity currency diminishes accordingly.

**Diminished Interest Rate Advantage**

The past perception of the AUD as a high-yield currency was mainly due to the interest rate differential between the Reserve Bank of Australia (RBA) and the Federal Reserve. However, as the US enters a rate hike cycle, the interest rate gap between Australia and the US is no longer as attractive as before. The RBA’s current cash rate is about 3.60%, and even if it rises to 3.85% in the future, it will be difficult to rebuild a relative interest advantage over the USD.

**Weak Domestic Economic Growth Momentum**

Australia’s domestic economic growth remains sluggish, and asset attractiveness is relatively low. In this environment, even if the AUD experiences technical rebounds, investor confidence remains limited. Whenever the exchange rate approaches previous highs, market selling pressure tends to increase.

## Three Core Variables That Determine the Medium- to Long-Term Trend of the AUD

To assess the future direction of the AUD, investors should focus on the interaction of the following three factors:

**Factor 1: RBA Monetary Policy Shift**

Whether the RBA’s rate hike expectations can be realized directly influences the AUD’s interest rate differential attractiveness. If inflation remains sticky and the employment market stays strong, maintaining a hawkish stance will help the AUD regain competitiveness. Conversely, if rate hike expectations fade, the AUD’s support will weaken significantly.

**Factor 2: China’s Economy and Commodity Cycles**

As Australia’s largest trading partner, China’s infrastructure and manufacturing activity directly drive prices of raw materials like iron ore. When China’s economy recovers, Australian export demand tends to strengthen, and the AUD usually reacts quickly; however, if China’s recovery is insufficient, even short-term rebounds in commodities may lead to a “high-level pullback” pattern in the AUD.

**Factor 3: US Dollar Cycle and Global Risk Sentiment**

The Federal Reserve’s policy direction remains a key factor in the global forex market. In a rate-cut environment, a weaker USD generally benefits risk-sensitive currencies like the AUD; but if risk aversion increases and capital flows into the USD, the AUD may weaken even if its fundamentals are unchanged. Currently, with global energy prices under pressure and weak demand, investors tend to favor safe-haven assets over cyclical currencies.

## AUD Outlook for 2024 and Beyond

Market opinions on the AUD’s prospects are divided. Morgan Stanley forecasts that by the end of 2025, the AUD/USD could rise to 0.72, supported by the RBA’s hawkish stance and strengthening commodity prices.

An independent model projects 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, assuming strong labor market conditions and a commodity demand recovery.

UBS holds a more cautious view, suggesting that uncertainties in global trade and changes in Fed policy may limit the AUD’s upside, with the exchange rate remaining around 0.68 by year-end. The National Australia Bank’s economic team warns that the AUD’s recovery may be short-lived, expecting it to peak in the first half of 2026 before declining.

Overall, it is likely that in the first half of 2026, the AUD will fluctuate within the 0.68-0.70 range. Short-term volatility will mainly stem from Chinese economic data and US employment figures, but given Australia’s solid fundamentals and relatively hawkish stance of the RBA, a significant decline in the AUD is unlikely. However, due to the persistent structural advantage of the USD, the AUD will also find it difficult to appreciate substantially. In the long term, resource exports and commodity cycles will remain the main bullish factors.

## How to Capture Changes in the AUD Trend

Although forex markets are highly volatile and difficult to predict, the AUD’s high liquidity, predictable volatility patterns, and distinct economic structure make medium- to long-term trend analysis relatively straightforward.

For the AUD to enter a genuine medium- to long-term bullish trend, three conditions must be met simultaneously: the RBA reasserts a hawkish stance, China’s actual demand improves, and the USD enters a structural weakening phase. If only one or two of these conditions are present, the AUD is more likely to remain in a range-bound oscillation rather than a sustained upward trend.

Investors can participate in AUD movements through forex margin trading. These trading instruments offer two-way mechanisms, leverage to amplify gains, low entry barriers, and high liquidity, making them suitable for investors of various capital sizes. However, all investments carry risks, and forex trading is a high-risk activity. Investors should carefully assess their risk tolerance and make cautious decisions.

In summary, the AUD’s characteristic as a commodity currency remains evident, with a strong correlation to commodity prices. In the short term, the hawkish stance of the RBA and strong raw material prices will provide support; but in the medium to long term, global economic uncertainties and potential USD rebounds could limit the AUD’s upside and lead to sideways movements.