The structural challenges behind the decade-long slump of the Australian dollar and rebound opportunities

The Australian dollar, as the fifth-largest global trading currency, holds an important position in the international foreign exchange market. However, this highly liquid, low-spread currency pair has faced long-term depreciation pressures in recent years. Calculated from the 1.05 level in early 2013, the AUD/USD has depreciated over 35% in the past decade, while the US dollar index has risen by 28.35% during the same period, reflecting a clear global strong dollar cycle.

Historical data indicates that the AUD’s movement is closely related to the global macro environment. Between 2009 and 2011, driven by China’s robust economic recovery and Australia’s interest rate advantage, the AUD/USD once rose to nearly 1.05; during the COVID-19 pandemic in 2020, Australia’s relatively stable containment measures, strong demand for commodities like iron ore in Asia, and central bank policy support pushed the AUD up about 38% within a year, briefly breaking through the 0.80 level; however, after 2023, as China’s economic recovery weakened, the AUD entered a prolonged oscillation. By 2025, the AUD/USD may see annual gains of 5-7%, but overall, it remains difficult to escape a weak trend.

The Threefold Dilemma of AUD Movement: Diminishing Interest Rate Differentials, Weak Commodity Demand, and Structural USD Strength

The AUD has long been viewed as a high-yield currency, with its attractiveness primarily based on interest rate arbitrage. However, this advantage has significantly diminished. The Reserve Bank of Australia (RBA) cash rate is about 3.60%, with market expectations of a possible hike to 3.85% again in 2026, but the interest rate differential advantage over the US has greatly narrowed compared to the past.

Deeper issues lie in Australia’s economic structure. As a typical commodity-exporting country, Australia’s exports are highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. When China’s economic momentum weakens and global demand for commodities declines, the AUD faces downward pressure. Coupled with the impact of US tariffs on global trade, raw material exports further decline, undermining the AUD’s status as a commodity currency.

From a technical perspective, whenever the AUD/USD approaches previous high zones, selling pressure increases significantly, reflecting limited market confidence in the AUD. With the structural advantage of the US dollar still unaltered and Australia’s domestic economic attractiveness relatively low, the AUD appears more as a “rebound but lacking trend” currency, susceptible to external factors rather than driven by its fundamentals.

Three Key Factors to Watch for AUD Trend

Investors seeking to grasp the turning points of the AUD should closely monitor three core variables:

First, RBA interest rate policy and interest rate differential reconstruction

Whether the RBA can maintain a relatively hawkish stance directly determines the AUD’s interest rate attractiveness. If inflation remains sticky and the labor market stays resilient, expectations of rate hikes can be realized, helping the AUD rebuild its interest rate advantage over the USD. Conversely, if rate hike expectations fall short or further rate cuts occur, the AUD’s support will weaken significantly.

Second, China’s economy and commodity cycle

China’s infrastructure investment, manufacturing activity, and demand directly influence prices of commodities like iron ore and coal. When China’s economy recovers, commodity prices tend to strengthen in tandem, and the AUD will quickly reflect this in the exchange rate. Conversely, if China’s recovery is insufficient, even short-term rebounds in commodities may lead to a “spike and fall” weak trend in the AUD.

Third, the US dollar cycle and global risk sentiment

The Federal Reserve’s policy direction remains central to the global FX market. In a rate-cut environment, the USD usually weakens, benefiting risk-sensitive currencies like the AUD; but if risk aversion rises and capital flows back into the USD, the AUD may weaken even if its fundamentals are unchanged. Given the current energy prices and global demand remain cautious, investors tend to prefer safe-haven assets over cyclical currencies, limiting the AUD’s upside.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA maintains a hawkish stance, China’s demand substantively improves, and the USD enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain in a range-bound oscillation rather than a one-way rally.

Multiple Institutions’ AUD Forecasts: Divergence with a Common Outlook

Market opinions on the AUD’s future are notably divided, though some consensus exists.

Morgan Stanley’s optimistic forecast suggests the AUD/USD could rise to 0.72 by the end of 2025, mainly supported by the RBA’s hawkish stance and rising commodity prices. The Traders Union’s statistical model further projects an average of about 0.6875 (range 0.6738-0.7012) by the end of 2026, rising to 0.725 by the end of 2027, emphasizing Australia’s strong labor market and commodity demand recovery.

These optimistic forecasts share a common basis: if the US economy achieves a soft landing and the dollar index declines, commodity currencies like the AUD will perform better.

UBS’s view is more conservative. While acknowledging Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with the exchange rate expected to stay around 0.68 by year-end.

Recent forecasts from Commonwealth Bank economists are more cautious, suggesting the AUD’s rebound may be short-lived. They predict the AUD/USD will peak around March 2026 but may fall back 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.

Overall, in the first half of 2026, the AUD is likely to fluctuate within the 0.68-0.70 range, influenced by China’s economic data and US employment figures. The AUD is unlikely to crash sharply because Australia’s fundamentals remain relatively solid, and the RBA remains hawkish, but it also cannot break through the 1.0 level easily, as the structural strength of the USD persists. Short-term pressures mainly stem from uncertainties in Chinese data, while long-term positives include resource exports and a global commodities cycle recovery.

Investment Implications of AUD Movement

As a highly liquid currency with strong volatility patterns, the long-term trend of the AUD is relatively easier to identify. The AUD’s close correlation with raw materials like copper, iron ore, and coal makes its currency characteristics prominent.

In the short term, the RBA’s hawkish stance and the strength of commodity prices will provide support; but in the medium to long term, investors should remain cautious of global economic uncertainties and potential rebounds in the USD, which could lead to increased volatility and limit upside potential.

While predicting the AUD’s precise trajectory is challenging, its high liquidity and distinct economic structure mean that by monitoring RBA policies, Chinese economic data, and USD trends, investors can still grasp the main medium- to long-term directions of the AUD.