The Behind-the-Scenes Factors Driving the Australian Dollar's Strength: Diverging Central Bank Policies and a Commodity Bull Market

The Australian dollar has recently gained momentum. As of December 30, the AUD/USD exchange rate stood at 0.6706, just one step away from the high of 0.6727 set on December 29, marking the highest level since October 2024. More impressively, from the beginning of 2025 to now, the AUD has appreciated by a total of 8.4%, showing a clear upward trend.

**Divergence in Central Bank Policies Is the Main Driver**

Delving into the fundamental reasons behind the AUD's strength, the key factor is the differing policy expectations between the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed). Recently, Australia's inflation has shown signs of rebound, and the December meeting minutes revealed a hawkish tone. The market widely expects the RBA to start a rate hike cycle in 2026. In contrast, the Fed remains in a rate-cutting cycle, with market expectations of two more rate cuts in 2026. This policy divergence directly supports the AUD/USD's upward movement.

**Commodity Supercycle Boosts Australia**

Beyond monetary policy, the commodity market is also contributing to the AUD's strength. Major commodities such as gold, silver, and copper continue to hit record highs. As a major global resource exporter, Australia benefits significantly. Rising commodity prices increase export revenues, further reinforcing investors' expectations for the AUD to appreciate.

**What Do Institutions Say? What Is the AUD Target in 2026?**

Deutsche Bank predicts that Australia's interest rate advantage among G10 currencies will further widen. The bank expects the AUD/USD to reach 0.69 in the second quarter of 2026, with a year-end target of 0.71. The National Australia Bank (NAB) offers a more aggressive forecast—assuming the RBA hikes rates twice in 2026, they believe the AUD/USD could rise to 0.71 in Q2 and further surge to 0.72 in Q3.

**Two Key Dates to Watch Next**

The future performance of the AUD depends on two major upcoming data releases. On January 28, Australia will release Q4 CPI data, which will directly influence market perceptions of the RBA's rate hike necessity; on February 3, the RBA will announce its latest interest rate decision, further confirming market expectations for rate hikes. These two events will determine whether the AUD's strength can continue, so investors should prepare in advance.