The fundamental reason behind the long-term weakness of the Australian dollar—what conditions are needed for it to bounce back?

The Australian dollar’s exchange rate trend has shown a continuous weakening over the past decade. This is not a coincidence but the result of multiple structural factors working together. As the fifth-largest traded currency globally, the AUD/USD pair attracts attention due to its liquidity and low spreads, but its long-term performance has been disappointing.

Why has the AUD fallen into a ten-year downtrend?

Using early 2013 as a reference point (when the AUD/USD exchange rate was about 1.05), over the ten years until the end of 2023, the Australian dollar has depreciated against the US dollar by over 35%. During the same period, the US dollar index rose by 28.35%, and major currencies like the euro, yen, and Canadian dollar also depreciated against the dollar, reflecting a global phenomenon—the sustained strong dollar cycle.

From a commodity cycle perspective, the decline in the AUD is closely related to changes in China’s economic demand. Between 2009 and 2011, China’s robust economic recovery drove commodity prices higher, pushing the AUD close to its high of 1.05. In contrast, from 2020 to 2022, despite a brief global commodities bull market (with iron ore reaching record highs), this rebound was also short-lived—the AUD once broke through 0.80 but failed to sustain its strength. Entering 2023-2024, China’s recovery has noticeably slowed, commodity demand has waned, and the AUD exchange rate has shifted to a long-term weakening trend.

The loss of interest rate advantage is another key reason for the declining attractiveness of the AUD. The AUD has traditionally been viewed as a high-yield currency, often targeted in carry trades. However, with the Reserve Bank of Australia (RBA) adjusting its policy, this advantage has gradually diminished, and confidence in the AUD has declined accordingly.

Three major factors determining the future direction of the AUD

The AUD exchange rate is not determined by a single variable but results from the interaction of three factors:

First, the RBA’s interest rate policy

Currently, the RBA’s cash rate is about 3.60%, with markets gradually pricing in a possible rate hike by 2026. If the RBA maintains a hawkish stance, with persistent inflation and a resilient labor market, the AUD could regain its interest rate advantage; conversely, if rate hikes are not realized, the AUD’s support will weaken significantly.

Second, China’s economy and commodity prices

Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen simultaneously, and the AUD responds quickly; however, if China’s recovery is insufficient, even a short-term commodity rebound may lead to a “spike and fall” pattern in the AUD.

Third, the US dollar cycle and global risk sentiment

The Fed’s policy cycle continues to dominate the global FX landscape. In a rate-cut environment, a weakening dollar generally benefits risk currencies like the AUD; but when risk aversion rises and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are sound. Recently, weak energy prices and sluggish global demand have led investors to favor safe-haven assets rather than cyclical currencies, limiting the AUD’s upside potential.

Forecast for the AUD exchange rate after 2026

Whether the AUD can break out of a true medium- to long-term bull trend depends on three simultaneous conditions: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the dollar. If only one or two of these conditions are met, the AUD is more likely to remain in a range rather than trend upward.

Market opinions on the AUD outlook are divided. Morgan Stanley expects the AUD/USD to rise to around 0.72 by the end of 2023, mainly supported by the RBA’s hawkish stance and a rally in commodities. Traders Union’s model shows an average expectation of about 0.6875 by the end of 2026 (range 0.6738-0.7012), emphasizing the importance of a strong Australian labor market and a recovery in commodity demand.

In contrast, UBS holds a more conservative view, believing that despite Australia’s economic resilience, global trade uncertainties and potential changes in Fed policy could limit the AUD’s gains, with an expected exchange rate around 0.68 by the end of 2023. The economists at the Commonwealth Bank of Australia offer a more cautious assessment, suggesting that the AUD’s recovery may be short-lived, predicting a peak around March 2026, but a possible decline again by year-end.

Overall, in the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, with short-term volatility mainly driven by Chinese data and US non-farm payroll reports. The AUD is unlikely to collapse sharply because of Australia’s relatively solid fundamentals and the hawkish stance of the RBA; however, the structural advantage of the dollar remains, making a direct surge in the AUD difficult. Short-term pressures stem from China’s data performance, while long-term opportunities come from resource exports and the turning point in the commodity cycle.

Key insights from the AUD exchange rate trend

As a commodity currency representing Australia’s exports of raw materials like iron ore and coal, the AUD’s movement is highly correlated with the prices of these commodities. Although foreign exchange markets are volatile and difficult to predict precisely, the AUD’s high liquidity and characteristic of strong cyclical volatility make medium- to long-term trend judgments relatively easier.

For a genuine reversal into a sustained upward trend, multiple conditions must be met simultaneously: widening interest rate differentials, a recovery in Chinese demand, and a weakening of the US dollar globally. Until these conditions are sufficiently in place, the AUD is more likely to remain in a range-bound pattern rather than achieve a one-sided rally.