Australian Dollar Dilemma: Why Is It Still Difficult to Rebound at Historic Lows? What Are the Key Factors for the 2026 Trend?

The Australian dollar was once the fifth most traded currency globally (after USD, EUR, JPY, GBP), and the AUD/USD pair remains among the top five most active currency pairs worldwide. Its high liquidity and tight spreads enable market participants to effectively implement various trading strategies.

However, reality is disappointing. Over the long term, the AUD’s performance over the past decade has been quite weak. Starting from around 1.05 in early 2013, by the end of 2023, the AUD has depreciated over 35% against the USD, while the US dollar index has risen by 28.35% during the same period. This is not just an AUD issue—EUR, JPY, CAD have also depreciated against the dollar, reflecting a strong dollar cycle globally. The AUD’s historical lows are a direct result of this super-strong dollar cycle.

Why is the AUD stuck at low levels? Three major factors form a “deadlock”

The weak trend of the AUD is not caused by a single factor. Market observations point out that US tariff policies impact global trade, leading to a decline in raw material exports, directly weakening Australia’s commodity currency status. Meanwhile, the interest rate differential between Australia and the US has become difficult to reverse, Australia’s domestic economic performance has fallen short of expectations, and asset attractiveness is relatively low.

The pandemic in 2020 was an exception. At that time, Australia’s pandemic control was relatively stable, demand for bulk commodities like iron ore was strong in Asia, and the Reserve Bank of Australia (RBA) adopted supportive policies, causing the AUD to rise sharply against the USD by about 38% within a year. But this was short-lived; afterward, the AUD returned to a consolidating or weakening trend.

Entering 2025, iron ore and gold prices surged, and the Federal Reserve’s rate cuts drove capital flows into risk assets, giving the AUD some upward momentum, reaching as high as 0.6636. Throughout 2025, the AUD appreciated about 5-7% against the USD, but in the long-term perspective, the fundamental weakness of the AUD remains unchanged.

Can the AUD turn around? Three key factors are indispensable

The medium- to long-term trend of the AUD is determined by multiple factors. Investors seeking to grasp the turning point need to monitor three core variables:

1. RBA interest rate policy—Will the interest rate differential be rebuilt?

The AUD is long regarded as a high-yield currency, with its attractiveness depending on the interest rate spread. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Market expectations suggest another rate hike could occur in 2026, with the Commonwealth Bank forecasting a peak of around 3.85%.

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

2. China’s economy and commodity prices—The external engine for the AUD

Australia’s export structure is highly reliant on iron ore, coal, and energy. The AUD is essentially a commodity currency, with China’s demand being the most critical variable. When China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen in tandem, quickly reflecting in the AUD exchange rate; if China’s recovery falters, even short-term commodity rebounds may be followed by declines in the AUD.

3. USD trend and global risk sentiment—Determining capital flows

The Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cut environment, the USD tends to weaken, benefiting risk currencies like the AUD; but if risk aversion rises and capital flows back into the USD, the AUD may face pressure even if its fundamentals are sound.

Recently, market sentiment has slightly improved, but energy prices and global demand remain weak, leading capital to favor safe-haven assets rather than cyclical currencies, limiting the AUD’s upside.

Core conclusion: For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously—RBA adopting a hawkish stance again, a substantial improvement in Chinese demand, and a structural weakening of the USD. 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.

Forecasts for 2026 and beyond: Divergent opinions on AUD’s trajectory

Most market analysts agree: the AUD has short-term recovery potential, but a return to a strong bull phase requires clear macroeconomic conditions.

Morgan Stanley’s optimistic outlook is notable—expecting the AUD/USD to possibly rise to 0.72 by the end of 2025. This is based on the possibility that the RBA maintains a hawkish stance and commodity prices stay strong.

The Traders Union’s statistical model projects 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 that a strong Australian labor market and a recovery in commodity demand will support gains.

UBS adopts a more cautious stance. They believe that although Australia’s economy remains resilient, global trade uncertainties and potential changes in Fed policy could limit the AUD’s upside, with forecasts around 0.68 by year-end.

Australian Federal Bank economists recently expressed a cautious view, suggesting the AUD’s rebound might be temporary—predicting the AUD/USD will peak around March 2026 but could fall back 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.

Personal observation: In the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese data and US non-farm payrolls. The AUD won’t collapse sharply because Australia’s fundamentals are solid and the RBA remains relatively hawkish; but it also won’t surge to 1.0, as structural USD advantages persist. Short-term pressures mainly stem from Chinese data releases, while long-term bullish factors include resource exports and the commodity cycle recovery.

Characteristics of AUD trading and medium- to long-term investment perspective

The reason the AUD/USD pair is worth attention lies in its liquidity advantage among the top five global trading pairs—characterized by strong volatility and relatively straightforward analysis. As a commodity-exporting currency, the AUD is highly correlated with prices of copper, iron ore, coal, and other raw materials.

In the short term, the hawkish stance of the RBA and strong commodity prices will provide support. But in the medium to long term, global economic uncertainties and potential USD rebounds could limit upside and induce volatility.

Although forex markets are volatile and predicting exchange rates precisely is challenging, the AUD’s high liquidity, predictable volatility patterns, and clear economic structure make trend analysis more manageable. This is why, even after hitting historic lows, the AUD continues to attract market attention.