Is a fixed deposit in AUD really cost-effective? An in-depth analysis from the perspectives of exchange rate trends and interest rate differentials

The Australian dollar has long been regarded as a high-yield currency, with many investors considering fixed deposits in AUD to earn interest rate differentials. But is this idea truly feasible? To answer this question, we need to first understand why the AUD has underperformed over the past decade and whether there is potential for a rebound in the future.

Why has the AUD depreciated by over 35% in ten years?

From early 2013, when the AUD/USD exchange rate was around 1.05, the currency has depreciated by more than 35% over the past decade. During the same period, the US dollar index surged by 28%, reflecting a global era of a strong dollar. Even with robust demand from BRICS countries and fluctuations in commodities like iron ore, the AUD has struggled to escape its overall downward trend.

There are three core reasons for the long-term weakness of the AUD:

First, the diminishing interest rate advantage. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Although market expectations suggest it may raise rates again to around 3.85% by 2026, the interest rate differential with the Federal Reserve has significantly narrowed. For fixed deposit investors, this means the profit margin from interest rate differentials is shrinking.

Second, unstable commodity demand. Australia’s export structure is heavily reliant on iron ore, coal, and energy. As China is its largest buyer, slowing economic growth there directly impacts the AUD’s performance. The recovery in China from 2023 to 2024 has been weak; despite a short-term rebound in iron ore prices, a sustained upward trend remains unlikely.

Third, the deterioration of the global trade environment. Escalating US tariffs on raw materials and slowing global economic growth have driven capital flows toward safe-haven assets (like the USD), rather than riskier currencies such as the AUD.

Will the AUD rebound? Three conditions determine its future trend

After peaking at 0.6636, the AUD has retreated, and market opinions on its rebound prospects are divided. To assess whether the AUD can sustain a medium- to long-term rally, three factors must be considered:

First, can the hawkish stance of the RBA be maintained? If the RBA continues to signal rate hikes and keeps rates relatively high, the interest rate advantage will be restored, benefiting the AUD. Conversely, if rate hike expectations fall short, both fixed deposit yields and exchange rates could face downward pressure.

Second, can China’s economy genuinely recover? A revival in infrastructure investment and manufacturing activity would directly boost iron ore prices and strengthen the AUD. Conversely, if domestic demand in China remains weak, the AUD may only experience short-term rebounds before falling again.

Third, is the USD entering a long-term depreciation cycle? In a low-interest-rate environment, a weakening USD generally benefits the AUD. However, if the US economy remains strong and the Fed maintains high rates, the USD will attract global capital, limiting the AUD’s upside potential.

All three conditions need to be favorable for a genuine bullish trend; if only one or two are met, the AUD is more likely to stay within a range rather than trend upward.

Practical considerations for AUD fixed deposits

When evaluating AUD fixed deposits, two dimensions should be considered: interest rate differentials and exchange rate risk.

Interest rate differential: The RBA’s 3.60% rate may seem attractive, but after accounting for US Treasury yields and exchange rate volatility, the actual arbitrage space is quite limited. Especially in an environment where the USD remains relatively strong, the interest advantage may not offset potential depreciation losses.

Exchange rate risk: Market forecasts for the AUD vary widely. Optimistic views (e.g., Morgan Stanley) project a rate of 0.72 by year-end, while conservative estimates (e.g., UBS) suggest around 0.68, which is already relatively high. This divergence reflects the high uncertainty surrounding the AUD’s future trajectory.

For small and medium investors, choosing AUD fixed deposits requires mental preparedness: short-term exchange rate fluctuations could erode the fixed deposit interest gains if the AUD continues to depreciate.

Outlook for the AUD in 2026

Based on analyses from various institutions, the AUD is likely to fluctuate within the 0.68-0.70 range in the first half of 2026. Key variables will be China’s economic data and US non-farm payroll figures.

In the long run, the AUD is unlikely to experience a sharp collapse due to Australia’s relatively stable fundamentals and long-term commodity demand; however, it also won’t surge to new highs because structural US dollar advantages persist. The AUD is more like a currency with rebound potential but lacking a clear trend.

Who should consider AUD fixed deposits?

If you are the following type of investor, AUD fixed deposits might be worth considering:

• Long-term bullish on China’s economic recovery and believe in a continued commodities bull market
• Optimistic about Australia’s resource export prospects and willing to tolerate 2-3 years of exchange rate fluctuations
• Have low capital costs and stable interest rate differentials contributing meaningfully to overall returns

Conversely, if you are pessimistic about the global economy, worried about the USD remaining strong, or have limited risk tolerance for exchange rate fluctuations, the appeal of AUD fixed deposits diminishes significantly.

Conclusion

As a commodity currency, the AUD’s performance is deeply tied to China’s demand and global commodity cycles. While there may be short-term rebound opportunities, medium- to long-term pressures such as interest rate convergence, a strong USD, and sluggish global demand remain. Whether fixed deposits in AUD can be profitable ultimately depends on your judgment of these three factors’ future developments. Instead of blindly chasing the reputation of AUD fixed deposits, it’s more rational to assess whether they suit your risk appetite and investment horizon.