Australian dollar's decade-long devaluation dilemma: From commodity cycles to exchange rate lows, can it turn around in the future?

The Australian dollar is the fifth-largest reserve currency by global trading volume, and the AUD/USD currency pair ranks among the top five most active trading pairs worldwide. Its high liquidity and low transaction spreads make it a popular choice for short-term trading and medium- to long-term allocations.

It is worth noting that the AUD has long been classified as a high-yield currency, often a focus for arbitrage trading and hot money flows. However, when viewed over a longer time horizon, the Australian dollar has generally underperformed over the past decade, with only brief rebounds during certain periods. The historical lows in the AUD exchange rate have not been fully reversed.

The Decade of Decline and Structural Mismatch Between Commodity Cycles and the AUD

Data shows that, using early 2013’s 1.05 as a baseline, the AUD has depreciated by over 35% against the USD over the past ten years (2013-2023). During the same period, the US Dollar Index (DXY) rose by 28.35%, and major currencies like the euro, yen, and Canadian dollar also collectively weakened against the dollar. This reflects a comprehensive strong dollar cycle, with the AUD performing relatively the weakest among them.

Although the AUD briefly strengthened during the pandemic year 2020 (appreciating about 38% against the USD), mainly due to relatively stable pandemic control in Australia, strong iron ore demand from Asia, and supportive policies from the Reserve Bank of Australia (RBA), most of the time since then the AUD has remained in consolidation or under pressure.

Entering 2025, with rising iron ore and gold prices, coupled with the Fed’s rate cuts driving capital into risk assets, the AUD experienced volatility and appreciated to around 0.6636. Over the entire year, the AUD appreciated approximately 5-7% against the USD. However, from a longer-term perspective, the structural weakness of the AUD has not fundamentally improved.

Why Commodity Rebounds and Dollar Weakness Still Leave the AUD in a Dilemma

The core reasons behind the market’s limited confidence in the AUD deserve in-depth analysis. Whenever the AUD approaches its historical highs, selling pressure increases significantly, reflecting doubts about the currency’s sustainability.

Analysts believe the main constraints include:

1. Structural Trade Risks. Evolving US tariffs and trade policies directly impact global trade, with raw material exports (metals, energy) facing downward pressure, weakening the commodity currency support for the AUD.

2. Difficulty in Rebuilding Interest Rate Differentials. The structural narrowing of the interest rate gap between the US and Australia means that even if the RBA hikes rates in the future, it will be hard to recreate the previous attractive interest differentials, posing a long-term challenge to the AUD as an “arbitrage trading pair.”

3. Insufficient Domestic Economic Momentum. Australia’s domestic economic growth remains sluggish, with relatively low asset attractiveness, unable to support the exchange rate through fundamentals alone.

Therefore, from a medium- to long-term perspective, the AUD resembles a “rebound but lacking a clear trend” currency. Without strong growth drivers or interest rate advantages, the AUD’s movements are more influenced by external factors rather than its own fundamentals, which is the core reason for market caution.

Three Key Variables to Monitor for AUD Trends

The medium- to long-term trend of the AUD is not determined by a single factor. Investors aiming to capture the turning points in the AUD’s bullish or bearish phases should focus on three core variables:

1. RBA’s Policy Direction

The long-term attractiveness of the AUD heavily depends on the interest rate differential structure. Currently, the RBA’s cash rate is about 3.60%, with markets gradually pricing in a possible rate hike in 2026. The Commonwealth Bank of Australia (CBA) forecasts a peak rate of around 3.85%.

If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA will help rebuild the AUD’s interest advantage; conversely, if rate hike expectations diminish, the AUD’s support will weaken significantly.

2. China’s Economic Trajectory and Commodity Prices

Australia’s export structure is highly concentrated in iron ore, coal, and energy. The AUD is essentially a typical commodity currency, with China’s demand being the most critical external variable. When China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen in tandem, and the AUD quickly reflects this; if China’s recovery falters, even short-term commodity rebounds may lead to “spikes and retracements” in the AUD.

3. USD Trends and Global Risk Sentiment

From a capital flow perspective, the Fed’s policy cycle remains central to the global FX market. A rate-cut environment generally favors risk-sensitive currencies like the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD can face downward pressure even if fundamentals are stable.

Despite recent improvements in market sentiment, energy prices and global demand remain uncertain, leading investors to prefer safe-haven assets like the USD over cyclical currencies like the AUD, limiting its upside potential.

Conclusion: For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously—RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the dollar. If only one of these is present, the AUD is more likely to remain range-bound rather than trend higher.

Major Institutions’ Forecasts for the AUD in 2026

The key question for the AUD’s future is: Can the rebound turn into a sustained trend? The consensus is that while the AUD has short-term recovery potential, a strong bullish phase requires clear macroeconomic conditions.

Different institutions have varying outlooks:

Morgan Stanley’s relatively optimistic forecast suggests the AUD/USD could rise to 0.72 by the end of 2025, supported by the RBA’s hawkish stance and rising commodity prices.

Independent models project an average of about 0.6875 for the AUD/USD at the end of 2026 (range 0.6738–0.7012), rising further to 0.725 by the end of 2027, based on strong Australian labor markets and commodity demand recovery. These optimistic forecasts share the assumption that if the US economy soft-lands and the dollar index declines, it will favor commodity currencies like the AUD.

UBS’s view is more conservative. While acknowledging Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit upside, with forecasts around 0.68 at year-end.

ANZ economists recently expressed a cautious outlook, suggesting the AUD’s recovery might be short-lived. They forecast the AUD/USD to peak around March 2026 but possibly decline again by year-end.

Some Wall Street analyses warn that if the US avoids recession but the dollar remains super-strong (due to persistent interest rate differentials), the AUD will struggle to break through resistance at 0.67.

Overall view: 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 payroll figures. The AUD is unlikely to crash sharply due to Australia’s solid fundamentals and relatively hawkish RBA, but also unlikely to surge unilaterally because of the dollar’s structural advantage. Short-term downside risks mainly stem from Chinese data, while long-term positives include resource exports and commodity cycle recovery.

Investment Perspective on Trading the AUD

As one of the top five most active currency pairs globally, AUD/USD features frequent trading, predictable volatility, and high liquidity. Although forecasting exchange rates is inherently challenging and models have limited short-term accuracy, the AUD’s economic structure makes medium- to long-term trend judgments relatively straightforward.

Investors can participate in AUD movements through forex margin trading. This approach allows for both long and short positions, flexible leverage, and the potential to profit in both bull and bear markets. It has relatively low entry barriers, suitable for small and medium investors.

It is important to remember that all investments carry risks. Forex trading is a high-risk asset class, and investors should be prepared for the possibility of losing their entire principal.

Final Thoughts on the AUD’s Long-Term Outlook

The AUD’s identity as a “commodity currency” of a resource-exporting country remains prominent, especially with its close correlation to prices of copper, iron ore, coal, and other raw materials. To reverse the historical lows in the exchange rate, the key remains in the strength of the commodity cycle recovery.

Market analysis suggests that in the short term, the RBA’s hawkish stance and strong raw material prices will provide support. However, in the medium to long term, global economic uncertainties and potential rebounds in the dollar will limit the upside and lead to more oscillation.

Although FX markets are volatile and precise predictions are difficult, the AUD’s high liquidity, clear volatility patterns, and its economic structure make medium- to long-term trend assessments more manageable. Investors should fully understand the interaction of these three key variables before making decisions to better grasp the opportunities in AUD trading.