Australian currency faces structural difficulties: the three main drivers behind long-term depreciation and outlook prospects before 2026

The Australian dollar holds a significant position in the global foreign exchange market, ranking as the fifth-largest traded currency. The AUD/USD currency pair is also one of the most actively traded instruments worldwide. However, despite ample liquidity and obvious spread advantages, the past decade has shown a remarkable depreciation trend. What underlying economic logic is hidden behind this phenomenon?

Ten Years of 35% Depreciation: Why Does the Australian Dollar Continue to Underperform?

Since early 2013 at the 1.05 level, the AUD/USD has depreciated over 35% in the past decade. During the same period, the US Dollar Index (DXY) rose by 28.35%, forming a stark contrast. The euro, yen, and Canadian dollar have also faced depreciation against the US dollar, reflecting an ongoing global strong dollar cycle.

Although commodity prices have rebounded in recent years—since the second half of 2025, iron ore and gold prices surged significantly, and the Fed’s rate cuts drove capital into risk assets—the AUD once rose to 0.6636, appreciating about 5-7% for the year—these rebounds ultimately cannot reverse the long-term weak trend of the Australian dollar. Whenever the AUD approaches previous highs, selling pressure increases noticeably, and market confidence in the AUD remains limited.

( Four Key Periods of AUD Movement

Three Fundamental Reasons for AUD Underperformance

Analyzing the predicament of the Australian dollar mainly stems from three structural issues:

First, deterioration of the trade environment hits commodity exports. US tariff policies have directly impacted global trade, leading to declines in metal, energy, and raw material exports, directly weakening the support for the AUD as a “commodity currency.” Australia’s export structure is highly concentrated in iron ore, coal, and energy, making it extremely sensitive to global commodity cycles.

Second, the US-Australia interest rate differential remains difficult to reverse. The Reserve Bank of Australia )RBA### currently has a cash rate of about 3.60%. Although market expectations suggest a possible rate hike to around 3.85% again in 2026, the US still maintains higher interest rates, preventing Australia from rebuilding its previous interest advantage. When the interest differential narrows, the appeal of the AUD as a “high-yield currency” diminishes significantly.

Third, domestic economic momentum is insufficient. Australia’s local economic growth is sluggish, and asset attractiveness is relatively low. If economic data do not show substantial improvement, the AUD cannot be supported by its fundamentals and can only fluctuate passively with external factors.

Three Core Variables Determining the AUD’s Trajectory

To accurately grasp the medium- to long-term trend of the AUD, investors need to focus on three interconnected key factors:

( 1. RBA Monetary Policy: Rebuilding the Interest Rate Differential

The hawkish or dovish stance of the Reserve Bank of Australia directly influences the AUD’s attractiveness. If inflation remains sticky and the employment market stays resilient, a hawkish RBA stance will help the AUD rebuild its interest rate advantage; conversely, if rate hike expectations fall short, the AUD’s support will weaken. Currently, market expectations for RBA rate hikes still exist, but the implementation remains to be seen.

) 2. Chinese Economy and Commodity Cycle: External Engine

Australia is essentially a commodity-exporting country, with Chinese demand being 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. Over the past three years, China’s economic recovery has been less than expected, which is a key background for the AUD’s long-term weakness.

3. US Dollar Trend and Global Risk Sentiment: Capital Flows

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 come under pressure even if fundamentals are stable. Currently, with weak global demand and unfavorable energy prices, investors tend to seek safe-haven assets, limiting the AUD’s upside potential.

2026 AUD Forecast: Can a Rebound Turn into a Trend?

Major institutions have differing views on the medium-term outlook for the AUD, reflecting market divergence in expectations:

Optimists like Morgan Stanley forecast that by the end of 2025, the AUD could rise to 0.72, mainly based on the RBA maintaining a hawkish stance and strong commodity prices. The Traders Union statistical model is even more optimistic, projecting an average of about 0.6875### in 2026, within a range of 0.6738-0.7012###, and rising further to 0.725 by the end of 2027, emphasizing strong Australian labor markets and commodity demand recovery. All these forecasts assume: if the US economy soft-lands and the dollar index declines, it will favor the AUD.

Cautious analysts like UBS believe that despite Australia’s economic resilience, uncertainties in global trade and changes in Fed policy could still limit the AUD’s gains, expecting it to stay around 0.68 by year-end. Economists at the Commonwealth Bank of Australia (CBA) are more conservative, suggesting the AUD’s recovery might be temporary, predicting it will peak around March 2026 but could fall back again by year-end. 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 through 0.67 resistance.

Practical Outlook: Overall, in the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70. Chinese economic data and US non-farm payroll figures will be the main drivers of short-term volatility. With relatively stable fundamentals and a hawkish RBA, the AUD is unlikely to collapse sharply, but due to the structural advantage of the dollar, it will also be difficult for the AUD to reach 1.0. Long-term upside potential remains in Australia’s resource exports and the potential recovery of commodity cycles.

Investment Mechanisms and Risks of the AUD

As one of the top five most traded forex pairs globally, the AUD/USD features high liquidity and regular volatility, making technical analysis relatively straightforward. Many investors participate in AUD fluctuations through forex margin trading, utilizing two-way trading and leverage tools ( usually 1-200x) to seek opportunities in bull and bear markets. The advantages of this trading method include low barriers and high flexibility, suitable for small to medium investors.

However, it must be emphasized that forex margin trading is high-risk investment, and investors may lose all their capital. Although the AUD’s movement shows relative regularity, in the context of increasing global economic uncertainty, prediction difficulty should not be underestimated. All investment decisions should be based on thorough risk assessment and personal risk tolerance.

Conclusion: Long-term Logic of the AUD

As a typical representative of commodity-exporting countries, the AUD is highly correlated with prices of iron ore, coal, gold, and other raw materials. In the short term, hawkish RBA stance and strong commodity prices will provide support; but in the medium to long term, attention must be paid to global economic uncertainties and the possibility of a US rebound. These factors will limit the upside of the AUD and lead to more volatile movements.

Although forex market fluctuations are rapid and exchange rates are difficult to predict precisely, the AUD’s high liquidity and distinctive economic structure make medium- to long-term trend analysis relatively feasible. To seize investment opportunities in the AUD, it is essential to monitor the interactions of RBA policy, Chinese economic data, and the US dollar trend, enabling more prudent decisions in the complex FX environment.