Why is the Australian dollar continuing to weaken? Is there a chance to reverse the downward trend in the future? AUD exchange rate trend analysis and forecast

The Australian dollar is one of the top five currencies with the largest trading volume globally, ranking second only to the US dollar, euro, Japanese yen, and British pound in the foreign exchange market. As one of the most active currency pairs, AUD/USD is known for its high liquidity and low spreads, making it an ideal choice for investors engaging in short-term trading and medium- to long-term positioning.

It is worth noting that the Australian dollar has long been labeled as a “high-yield currency,” often targeted by carry trade and hot money inflows. However, when viewed over a longer time horizon, the overall performance of the AUD over the past decade has been disappointing, with only certain periods showing more noticeable rebounds.

Exceptions During the Pandemic and Subsequent Weakness

During the COVID-19 pandemic in 2020, the AUD experienced a strong rally. At that time, Australia’s pandemic control was relatively stable, demand for commodities like iron ore in Asia was robust, and the Reserve Bank of Australia (RBA) implemented supportive policies, jointly driving the AUD to rise approximately 38% within a year. However, after this rebound, the AUD mostly entered consolidation or downtrend phases.

Entering 2025, with rising iron ore and gold prices, and the Federal Reserve’s rate cuts prompting capital flows into risk assets, the AUD also showed signs of recovery. The AUD/USD briefly rose to around 0.6636, achieving a gain of about 5% to 7% for the year. But from a broader perspective, the downward trend of the AUD still remains largely unaltered.

Structural Weaknesses of the AUD: Why Rebounds Are Difficult to Sustain

The performance of the AUD over the past ten years has been lackluster, with diminishing interest rate differentials and declining commodity demand. Using early 2013 levels of 1.05 as a baseline, the AUD has depreciated over 35% against the USD in the past decade, while the US dollar index has risen by 28.35% during the same period. In comparison, the euro, yen, and Canadian dollar have also experienced depreciation against the dollar, reflecting a prolonged strong dollar cycle globally.

From both technical and fundamental perspectives, the AUD remains at a relative disadvantage. Even when rebounds occur, it is difficult for the currency to stabilize at high levels. Each time the AUD approaches previous highs, selling pressure increases significantly, indicating that investor confidence in the AUD remains limited.

The main reasons for the AUD’s weakness include: US tariffs impacting global trade, leading to declines in metal and energy exports, which undermines the commodity currency foundation; the inability to reverse interest rate differentials between Australia and the US; and insufficient domestic economic growth in Australia, weakening asset attractiveness. Therefore, the AUD is more like a “rebound but trendless” currency, easily influenced by external factors and less driven by its own fundamentals.

Three Key Indicators to Track AUD Trends

Investors aiming to accurately grasp the medium- to long-term direction of the AUD should focus on the following three driving factors:

1. RBA’s monetary policy

The long-standing appeal of the AUD as a high-yield currency mainly depends on interest rate differentials. Currently, the RBA’s cash rate is about 3.60%, and market expectations are gradually forming that rates may rise again in 2026. The Commonwealth Bank of Australia even forecasts a potential peak of 3.85%. If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA could help rebuild the AUD’s interest rate advantage; conversely, if rate hikes fall short, the AUD’s support will weaken significantly.

2. China’s economy and commodity prices

Australia’s export structure is highly dependent on iron ore, coal, and energy, which determines its commodity currency nature, with Chinese demand being a key factor. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen, and the AUD often reacts swiftly; but if China’s recovery lacks momentum, even short-term commodity rallies may be followed by declines in the AUD.

3. USD trend and global risk sentiment

From a capital flow perspective, the Fed’s policy cycle remains a core variable in the global FX market. A rate-cut environment generally favors risk currencies like the AUD, but if risk aversion increases and capital flows back into the USD, the AUD can weaken even if its fundamentals are stable. Despite recent improvements in market sentiment, soft energy prices and weak global demand still lead investors to prefer safe-haven assets over the AUD, which is a cyclical currency.

For a true medium- to long-term bullish trend, the AUD must simultaneously meet three conditions: the RBA adopts a hawkish stance again, China’s economy substantively improves, and the USD enters a structural weakening phase. Meeting only one of these conditions is more likely to result in the AUD remaining in a range-bound oscillation rather than a clear upward trend.

Institutional Forecasts for the AUD’s Future

The key question for the AUD’s future is whether the “rebound can evolve into a trend.” The consensus is that the AUD has short-term recovery potential, but a return to a strong bullish phase requires clearer macroeconomic alignment.

Major financial institutions have differing outlooks. Morgan Stanley is relatively optimistic, projecting the AUD/USD could rise to around 0.72 by the end of 2025, based on the RBA’s hawkish stance and commodity price support.

An independent statistical model forecasts an average of about 0.6875 for the AUD at the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, emphasizing the role of Australia’s resilient labor market and commodity demand recovery. The common logic behind these optimistic forecasts is that if the US economy achieves a soft landing and the dollar index declines, it will favor the performance of commodity currencies like the AUD.

UBS takes a more conservative stance, believing that despite Australia’s economic resilience, global trade uncertainties and Fed policy shifts could limit the AUD’s gains, with the exchange rate expected to stay around 0.68 by year-end.

The economists at the Commonwealth Bank of Australia suggest a more cautious view, predicting the AUD/USD will peak around March 2026 but may decline again by year-end. Some Wall Street analysts warn that if the US avoids recession but the dollar remains strong due to interest rate differentials, the AUD may struggle to break through resistance at 0.67.

In summary, the AUD is likely to fluctuate between 0.68 and 0.70 in the first half of 2026, mainly influenced by Chinese economic data and US employment figures. A sharp collapse is unlikely because Australia’s fundamentals are relatively stable and the RBA remains hawkish, but it probably won’t surge to 1.0 due to persistent structural dollar advantages. Short-term pressures mainly stem from China’s data performance, while medium- to long-term positives include resource exports and commodity cycle recovery.

Ways to Invest in the AUD and Risk Tips

The AUD/USD is among the top five most traded forex pairs globally. Although currency forecasts are inherently challenging, the Australian economy’s distinctive structure and liquidity make analyzing the AUD comparatively easier.

Investors can seek returns through forex margin trading, which supports both long and short positions, offering leverage options from 1 to 200 times. This allows profit opportunities in rising markets and opportunities in declining markets, making it friendly for small- and medium-sized investors.

However, it must be emphasized that all investments carry risks. Forex trading is a high-risk activity, and investors may lose all their capital.

Summary of the AUD Outlook

As a “commodity currency” of a major commodity-exporting country, the AUD’s attributes remain prominent, especially with high correlation to metals like copper, iron ore, and coal.

Market analysis suggests that in the short term, the hawkish stance of the RBA and strong commodity prices will provide support. However, medium- to long-term risks include global economic uncertainties and potential USD rebounds, which could limit the AUD’s upside and increase volatility.

Although forex market fluctuations are rapid and forecasts are inherently difficult, the AUD’s high liquidity, strong cyclical patterns, and unique economic structure make medium- to long-term trend judgments relatively manageable. Investors interested in analyzing the AUD’s trend can monitor commodity prices, central bank policies, and global economic data continuously to gradually develop their trading strategies.