## Why Does the AUD Exchange Rate Continue to Underperform? Is There a Turnaround Opportunity in 2026?

The Australian dollar is among the top five most traded currencies globally (USD, EUR, JPY, GBP, AUD), and AUD/USD is also one of the most active currency pairs. Its high liquidity and low spreads make it a preferred target for many investors engaging in short-term trading or medium- to long-term positioning.

Particularly noteworthy is that the AUD has long been regarded as a **high-yield currency**, consistently attracting hot money and interest rate arbitrage trading. However, its performance over the past decade has been disappointing—showing a generally weak trend with rebounds only during specific periods.

### Why has the AUD been unable to strengthen? The reasons behind a depreciation of over 35% in ten years

Looking from a baseline of 1.05 at the beginning of 2013, the AUD/USD has depreciated over 35% in the past decade, while the US dollar index (DXY) has risen by 28.35% during the same period. Major currencies like the euro, yen, and Canadian dollar face similar challenges—this is part of a comprehensive **strong dollar cycle** at play.

The COVID-19 pandemic in 2020 marked a turning point. Australia's relatively stable pandemic control, strong demand for commodities like iron ore in Asian markets, and coordinated central bank policies jointly drove the AUD/USD to surge approximately 38% within a year. However, this rally was not sustained, and the AUD subsequently entered a phase of consolidation and weakness.

Entering 2025, iron ore and gold prices soared, and the Federal Reserve's rate cuts also prompted capital flows into risk assets, causing the AUD to fluctuate higher. The AUD/USD once reached 0.6636, with an annual increase of about 5–7%. Nonetheless, on a longer-term scale, the overall weak trend of the AUD remains unchanged.

### Why do commodities rebound and the dollar weaken, yet the AUD still struggles to break through?

Whenever the market sees the AUD approaching previous highs, selling pressure increases significantly, reflecting limited confidence in the currency. The key reasons are threefold:

**First, US tariff policies weigh on global trade.** The export of raw materials (metals, energy) faces downward pressure, directly undermining the AUD's status as a commodity currency.

**Second, the Australian interest rate advantage is hard to reverse.** The domestic economy remains sluggish, and asset attractiveness is relatively low, making it difficult to attract sufficient hot money inflows.

**Third, external factors dominate the trend.** The AUD lacks clear growth momentum and interest rate advantages, making its movement highly susceptible to global economic fluctuations rather than domestic fundamentals.

Therefore, the AUD is more like a currency with **rebound potential but lacking a clear trend**. This is also the core reason why the market remains cautious about it.

## The Three Key Factors to Monitor for AUD Exchange Rate Trends

Investors seeking to judge the bullish or bearish turning points of the AUD need to focus on the following three decisive variables:

### 1. RBA interest rate policy: Can the interest rate differential regain its advantage?

The long-term attractiveness of the AUD heavily depends on the interest rate structure. Currently, the Reserve Bank of Australia (RBA) cash rate is about 3.60%. The market is gradually shifting expectations toward a possible rate hike again in 2026, with Commonwealth Bank of Australia (CBA) forecasting a peak rate potentially reaching 3.85%.

If inflation remains sticky and the employment market stays resilient, the RBA's hawkish stance will help rebuild the interest rate differential advantage for the AUD; conversely, 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

Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a **commodity currency**. China’s demand is the most critical variable—when China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen in tandem, quickly reflecting in the AUD exchange rate; if China’s recovery falters, even a short-term commodity rebound may lead to a “spike and retreat” pattern in the AUD.

### 3. USD trend and global risk sentiment: Determining capital flows

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

Recently, market sentiment has slightly improved, but energy prices and global demand remain cautious. Investors tend to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

## 2026 AUD Outlook: How Do Major Institutions View It?

The core question for the AUD’s future trajectory is "**Can the rebound turn into a trend**." Most market analysts agree that while the AUD has room for short-term recovery, returning to a strong bullish trend requires clearer macroeconomic conditions.

Different institutions have varying outlooks:

**Morgan Stanley** projects the AUD/USD could rise to **0.72 by the end of 2025**. This forecast is mainly based on the possibility that the RBA maintains a hawkish stance and the strengthening of commodity prices providing support.

**Traders Union’s** statistical model indicates 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, emphasizing strong Australian labor markets and a recovery in commodity demand.

**UBS** adopts a more conservative view, believing that despite resilience in Australia’s economy, global trade uncertainties and potential changes in Fed policies could limit the AUD’s gains, with an expected exchange rate around **0.68 by year-end**.

**CBA Economists** recently expressed a cautious outlook, suggesting the AUD’s recovery might be temporary, predicting the AUD/USD will peak around March 2026 but could fall 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.

**Overall observation:** 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. The AUD won’t crash sharply because Australia’s fundamentals are solid and the RBA remains relatively hawkish, but it also won’t surge to new highs (as structural dollar strength persists). Short-term pressures mainly stem from Chinese data, while long-term positives include resource exports and commodity cycles.

## Investment Opportunities and Risks for the AUD

As one of the top five most traded forex pairs globally, the AUD/USD exchange rate is influenced by complex factors. However, given the distinctive features of the Australian currency and its high liquidity, analyzing its trend is relatively straightforward.

The AUD is essentially a **commodity currency**, closely linked to prices of copper, iron ore, coal, and other raw materials. This means investors should focus on global commodity markets when assessing the AUD’s outlook.

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 rebounds in the dollar could limit upside and cause increased volatility.

Although forex markets are inherently volatile and difficult to predict precisely, the AUD’s high liquidity, strong cyclical patterns, and clear economic structure make medium- to long-term trend judgments more accessible. This is also why the AUD exchange rate remains a key focus for professional investors.