Why has the Australian dollar remained weak over the past ten years? Will the rebound in 2026 continue?

The Australian dollar is the fifth most traded currency globally, ranking alongside the US dollar, euro, Japanese yen, and British pound. The “AUD/USD” currency pair is also known for its high liquidity and low spreads, making it popular among short-term traders and medium- to long-term investors.

However, when looking at a longer time horizon, the AUD has performed quite weakly over the past decade. Starting from a level of 1.05 in early 2013, the AUD/USD has depreciated by over 35% by 2023, while the US dollar index (DXY) has risen by 28.35%. This is not unique to the AUD—similarly, the euro, yen, and Canadian dollar have also depreciated against the dollar, reflecting a broader characteristic of the era: the ongoing suppression by a strong dollar cycle.

Deep-rooted Reasons for the AUD’s Decade of Weakness: Diminishing Commodity Demand and Loss of Interest Rate Advantage

The AUD has long been viewed as a high-yield currency, its attractiveness built on interest rate differentials and commodity demand. But both of these supports are weakening.

First, commodity demand is declining. Australia’s export structure is heavily concentrated in raw materials like iron ore, coal, and energy. Essentially, the AUD is a typical commodity currency. Its dependence on China is especially significant—when China’s economy slows, iron ore demand drops, and the AUD is forced into a passive decline. Since 2023, China’s recovery momentum has been insufficient; despite short-term rebounds in commodities, the AUD struggles to sustain gains, repeatedly showing a “rise and fall” pattern.

Second, the interest rate differential has narrowed significantly. The previous driver of AUD appreciation was the interest rate gap between Australia and the US. But as global central banks adjust their policies, this advantage has diminished. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. Although markets expect a possible hike to 3.85% by 2026, relative to the Federal Reserve’s policy stance, the interest rate advantage is much less than before.

Additionally, US trade policies and the worsening global trade environment have suppressed demand for commodities. As trade tensions inhibit global demand for raw materials, resource-exporting Australia faces direct impacts, further weakening its status as a resource currency and its economic attractiveness.

Therefore, the AUD today resembles a “rebound but lacking a trend” currency—short-term movements may be driven by commodity prices or risk appetite, but structurally, it faces significant constraints for medium- to long-term appreciation.

Review of the 2025 Rebound

In the first half of 2025, the AUD/USD rose to 0.6636, appreciating about 5-7% over the year. This rebound was driven by several factors:

• Sharp increases in iron ore and gold prices
• The Federal Reserve cutting interest rates, prompting capital flows into risk assets
• Australia’s relatively stable economic fundamentals providing support

However, this rally failed to break through previous highs. Each time the AUD approached its historical highs, selling pressure increased, indicating limited market confidence in the currency. This highlights a core issue: the lack of clear growth momentum and interest rate advantage support, with the AUD’s movements overly dependent on external factors rather than its own fundamentals.

Three Key Factors to Watch for AUD’s Future Direction

To grasp the turning points of the AUD’s strength or weakness, investors should focus on these three:

1. RBA Interest Rate Policy: Can the interest rate differential be restored?

The monetary policy stance of the Reserve Bank of Australia is crucial. If inflation remains sticky and the labor market stays resilient, a hawkish RBA stance could help rebuild the AUD’s interest rate advantage, attracting international capital. Conversely, if rate hike expectations fade, the AUD’s support will weaken significantly.

2. China’s Economy and Commodity Prices: External drivers for the AUD

As a commodity currency, the AUD is highly sensitive to Chinese demand. When China’s infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen, and the AUD quickly reflects this; when activity slows, the currency often struggles to rebound. This is the most important variable influencing the AUD’s trend.

3. US Dollar Trends and Global Risk Sentiment: Capital flow determinants

The Federal Reserve’s policy cycle remains central to the global FX market. A rate-cut environment generally benefits risk currencies like the AUD, which tend to benefit from capital inflows. But if risk aversion rises and capital flows back into the dollar, the AUD can weaken even if its fundamentals are stable.

In summary, for the AUD to enter a genuine medium- to long-term bullish phase, three conditions must be met simultaneously: the RBA shifts back to a hawkish stance, China’s demand substantively improves, and the US dollar enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain in a range rather than trend upward.

AUD Outlook: 2026 and Beyond

Market analysts are divided on the AUD’s future. Optimists believe that if the US economy soft-lands and the dollar index declines, commodity currencies like the AUD will benefit, with forecasts suggesting the AUD/USD could reach 0.70–0.72 by the end of 2026. This scenario assumes the RBA maintains a hawkish stance and commodity prices stay strong.

Pessimists warn that global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with forecasts around 0.68 by year-end, and if the dollar remains super-strong due to interest rate differentials, the AUD may struggle to break above 0.67.

From my personal perspective, 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 fall sharply because Australia’s fundamentals remain solid and the RBA remains relatively hawkish; but it also won’t surge to new highs, given the ongoing structural strength of the dollar. Short-term pressures mainly stem from Chinese economic data, while long-term upside potential hinges on a recovery in Australia’s resource exports and commodity cycles.

Trading Points for the AUD

The AUD/USD’s high liquidity and regular volatility, combined with Australia’s distinctive economic structure, make medium- to long-term trend analysis relatively straightforward—suitable for traders with some analytical experience.

Forex trading allows for both long and short positions, with relatively low entry barriers, making it accessible for small and medium investors. However, all investments carry risks; currency fluctuations are rapid and difficult to predict accurately, and most models have limited short-term effectiveness. Traders should carefully assess their risk tolerance and implement proper risk management.

Conclusion

As a commodity currency, the AUD’s movements are highly correlated with global commodity prices, Chinese demand, and the strength of the US dollar. In the short term, hawkish RBA policies and strong raw material prices will provide support; but in the medium to long term, global economic uncertainties and the potential rebound of the dollar will limit upside potential.

Understanding the roots of the AUD’s decade-long weakness and the three key factors influencing its future performance is essential for assessing its medium- to long-term trajectory. When seeking opportunities in the FX market, investors should base decisions on thorough analysis rather than market sentiment alone.