When will the ten-year decline of the Australian dollar against the US dollar end? An in-depth analysis of the challenges and opportunities for commodity currencies

The Australian Dollar’s Awkward Position: Strong Liquidity but Signs of Fatigue

AUD/USD is among the top five most actively traded currency pairs globally, with ample liquidity and low spreads. Theoretically, this should attract a large number of investors. However, when looking over a longer time horizon, the performance of the Australian dollar over the past decade has been disappointing—showing a clear overall weakening trend, with rebounds only occurring during specific periods.

The AUD has historically been viewed by the market as a “high-yield currency,” a common target for arbitrage trading and hot money flows. But this advantage has significantly diminished. Starting from around 1.05 in early 2013, the AUD/USD has depreciated over 35% in the following ten years, while the US dollar index (DXY) rose by 28.35%. Compared to other major currencies like the euro, yen, and Canadian dollar, this depreciation against the dollar indicates that the entire market is in a clear “strong dollar cycle.” The AUD is not an isolated case but a loser in a comprehensive currency competition.

Weakening Commodity Demand and Narrowing Interest Rate Differentials: A Dual Dilemma

The fundamental reasons for the poor performance of the AUD can be seen through comparisons across three periods.

2009-2011: China’s robust economic recovery led to strong demand for iron ore and coal. Australia’s interest rates were significantly higher than those in the US, pushing the AUD close to 1.05. At that time, the AUD was a typical commodity currency and favored in interest rate differential trades.

2020-2022: A global commodities bull market and record-high iron ore prices, coupled with the Reserve Bank of Australia (RBA) initiating a rapid rate hike cycle, pushed the AUD above 0.80. During this pandemic period, Australia’s relatively stable pandemic response also provided additional support for the currency.

2023-2024: China’s economic recovery weakened, commodity prices fluctuated at high levels, and the interest rate differential between Australia and the US began to narrow. The AUD entered a prolonged weak trend, struggling to regain lost ground.

In 2025, signs of a turnaround appeared. Iron ore and gold prices surged significantly, and the Federal Reserve’s rate cut cycle drove capital flows into risk assets, pushing the AUD/USD to 0.6636, with an annual increase of about 5-7%. However, from a longer-term perspective, this rebound still lacks a clear trend and appears more as a cyclical correction rather than a structural strengthening.

Why Does the Rebound Always Seem Just Out of Reach? Three Major Obstacles

Despite recent improvements, whenever the AUD approaches previous high zones, selling pressure increases noticeably, and market confidence remains limited. Analysis indicates the main issues include:

First: US tariff policies impact global trade. Declining demand for raw materials (metals, energy) directly undermine the commodity currency nature of the AUD. As a resource-exporting country, Australia cannot remain insulated.

Second: The interest rate differential between Australia and the US remains difficult to reverse. Even if the RBA maintains a relatively hawkish stance, it cannot establish a clear advantage over the Fed in interest rates. The Australian economy is not strong enough, with volatile economic data and relatively weak asset attractiveness.

Third: External demand remains weak. Although China occasionally implements policy stimulus, overall economic recovery remains insufficient, limiting import demand and affecting Australian commodity purchases.

From a medium- to long-term perspective, the AUD resembles a “rebounding but trendless” currency. Its movements are more driven by external factors rather than fundamentals, which explains why the market remains cautious about the AUD.

Three Key Variables to Watch for AUD Trends

To assess whether the AUD has the potential for sustained appreciation, investors should focus on the interaction of these three variables:

1. RBA interest rate policy and interest rate differential reconstruction

The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Market expectations suggest a possible rate hike again by 2026, with the Commonwealth Bank of Australia forecasting a peak of 3.85%. If inflation remains sticky and the labor market stays resilient, the RBA’s hawkish stance could help rebuild the interest rate advantage for the AUD. Conversely, if rate hike expectations falter, the support will weaken significantly. Additionally, the relative movement of the TWD/AUD exchange rate also reflects regional monetary policy divergence and warrants attention.

2. China’s economy and commodity prices

Australia’s export structure is highly concentrated in iron ore, coal, and energy. The AUD remains fundamentally a commodity currency, with China’s demand being the most critical variable. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen, and the AUD exchange rate quickly reflects this; if China’s recovery remains insufficient, even a short-term commodity rally may be followed by a quick retreat of the AUD.

3. US dollar trend and global risk sentiment

The Federal Reserve’s policy cycle remains central to the global forex market. In a rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD; however, if risk aversion increases and capital flows back into the dollar, the AUD can come under pressure even if fundamentals are unchanged. Current energy prices and global demand remain cautious, with investors favoring safe-haven assets over cyclical currencies.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA maintaining a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the US dollar. If only one of these is present, the AUD is more likely to stay in a range-bound oscillation, making a one-way rally unlikely.

Outlook for the AUD in 2026 and Beyond: Consensus and Divergence

Major institutions’ views on the AUD’s future are increasingly divergent, reflecting high uncertainty in forecasts.

Optimists believe, with Morgan Stanley predicting the AUD/USD could rise to 0.72 by the end of the year, mainly based on the RBA’s hawkish policies and strengthening commodity prices. The Traders Union statistical model forecasts an average of about 0.6875 (range 0.6738-0.7012) by the end of 2026, rising further to 0.725 by the end of 2027, emphasizing Australia’s labor market resilience and commodity demand recovery.

Pessimists point out that UBS believes, despite Australia’s economic resilience, global trade uncertainties and Fed policy changes could limit the AUD’s upside, with a forecast of around 0.68 at year-end. The economists at the Commonwealth Bank of Australia are more cautious, predicting the AUD/USD will peak around March 2026 but may decline again by year’s end.

Neutral views suggest that if the US avoids recession but the dollar remains extremely strong, the AUD will struggle to break through 0.67. 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 is unlikely to crash significantly (given Australia’s solid fundamentals and relatively hawkish RBA), but also unlikely to surge to 1.0 (due to persistent structural dollar strength). Short-term pressures mainly stem from Chinese data, while long-term positives include Australia’s resource exports and commodity cycles.

Core Insights for AUD Investment

As a representative currency of resource-exporting countries, the AUD’s correlation with iron ore, coal, copper, and other raw material prices is evident. In the short term, the RBA’s policy stance and strong raw material prices will provide support; in the medium to long term, investors should remain cautious of global economic uncertainties and potential US dollar rebounds, which could limit the AUD’s upside and lead to more volatile movements.

Due to high liquidity, strong cyclical patterns, and the distinct structure of the Australian economy, medium- to long-term trend judgments based on commodity and policy cycles are relatively easier to grasp. However, forex markets are inherently volatile, and accurately predicting exchange rate movements is challenging. Investors should consider their risk tolerance and time horizon carefully when participating in AUD trading.