Is the Australian dollar under long-term pressure but with a rebound opportunity? The key to the AUD's direction in 2026 lies in these three points

The Australian dollar is one of the top five major currencies by trading volume globally, and the AUD/USD currency pair is also highly regarded for its liquidity and low spreads. However, over the long term, the overall performance of the AUD has been quite disappointing.

Why has the AUD depreciated over 35% in ten years and fallen into a long-term weakness?

Looking back to early 2013 at the 1.05 level, the AUD has depreciated over 35% against the USD in ten years, while the US dollar index has risen by 28.35% during the same period. This is not just an AUD issue; major currencies like the euro, yen, and Canadian dollar also show a depreciating trend against the dollar, reflecting a comprehensive strong dollar cycle.

Several core reasons underpin the persistent weakness of the AUD:

First, weak commodity demand. Australia’s export structure heavily relies on iron ore, coal, and energy, and with China’s economic recovery lacking momentum, this directly impacts Australia’s commodity currency status. Additionally, US tariff policies have disrupted global trade, further reducing raw material exports.

Second, diminishing interest rate advantage. The AUD was once considered a high-yield currency, but the interest rate gap between Australia and the US has become difficult to reverse, leading to a significant decline in capital inflows.

Third, limited domestic economic attractiveness. Australia’s sluggish domestic economy results in assets being relatively less attractive, further weakening foreign investment incentives.

The most direct manifestation is: whenever the AUD approaches previous highs, market selling pressure increases significantly, indicating that confidence in the currency remains limited.

Can the rebound in 2025 continue? The key depends on three factors

Interestingly, the AUD experienced a noticeable rebound in the second half of 2025. Iron ore and gold prices surged, and the Federal Reserve’s rate cuts drove capital into risk assets, pushing the AUD/USD up to 0.6636, with an appreciation of about 5–7% for the year.

But will this rebound turn into a trend? The answer depends on the following three points:

1. RBA monetary policy: Can the interest rate advantage be regained?

The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Market expectations suggest a possible rate hike again in 2026, with the Commonwealth Bank even forecasting a peak rate of around 3.85%.

If inflation remains sticky and the employment market stays resilient, the RBA’s hawkish stance will help rebuild the interest rate differential for the AUD; conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly. This is the first critical factor in determining the medium-term trend of the AUD.

2. China’s economy and commodity prices: External drivers for the AUD

The AUD is essentially a commodity currency, with China’s demand being the most crucial variable. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen simultaneously, and the AUD exchange rate usually reflects this quickly; but if China’s recovery lacks momentum, even a short-term rebound in commodities may lead to a “spike and fall” scenario for the AUD.

3. USD trend and global risk sentiment

The Fed’s policy cycle remains central to the global forex market. In a rate-cut environment, a weakening dollar generally benefits risk currencies, and the AUD benefits relatively more; but if risk aversion increases and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are unchanged.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA reverts to a hawkish stance, China’s demand substantially improves, and the dollar enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain in a range-bound oscillation rather than a one-way rally.

How do institutions view the AUD’s outlook? Diverging forecasts

Market analysts have differing views on the AUD’s trajectory beyond 2026:

Morgan Stanley is optimistic, expecting the AUD to possibly rise to 0.72 against the USD, mainly based on the RBA maintaining a hawkish stance and strong commodity prices.

Traders Union’s statistical 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.

UBS is more conservative, believing that global trade uncertainties and Fed policy changes will continue to limit the AUD’s upside, with an expected year-end rate around 0.68.

CBA analysts offer the most cautious outlook, suggesting that the AUD’s recovery may be temporary, forecasting a peak around March 2026, with a possible decline again by year-end.

Overall, in the first half of 2026, the AUD is likely to oscillate within 0.68–0.70, influenced by Chinese data and US non-farm payrolls. The AUD won’t crash due to solid fundamentals and a relatively hawkish RBA, but it also won’t surge to new highs because of the ongoing structural dollar strength. Short-term pressures mainly stem from Chinese economic data, while long-term positives include resource exports and commodity cycles.

Investment insights on the AUD’s trend

As a “commodity currency,” the AUD remains highly correlated with prices of raw materials like copper, iron ore, and coal. In the short term, a hawkish RBA stance and strong commodity prices can provide support; but in the medium to long term, global economic uncertainties and potential dollar rebounds will limit the upside.

Although forex markets are volatile and difficult to predict precisely, the AUD’s high liquidity, strong volatility patterns, and its economic structure make medium- to long-term trend analysis relatively accessible. For investors seeking diversified asset allocations, monitoring the AUD’s movements is worthwhile.