The underlying reasons for the sustained pressure on the Australian dollar—Commodity cycle and interest rate differential analysis

The Australian dollar, as one of the top five major currencies by global trading volume, has always attracted investor attention due to its high liquidity and low transaction costs. However, from a long-term perspective, the overall performance of the AUD has been relatively weak over the past decade. Although since 2025, driven by a rebound in commodities and adjustments in the US dollar trend, the AUD/USD once rose to 0.6636, with an appreciation of about 5-7% this year, whether this rebound can translate into a medium- to long-term trend remains uncertain.

35% Depreciation in Ten Years: Why Is the AUD in a Long-Term Weakness?

Data shows that, based on the early 2013 level of 1.05, the AUD/USD has depreciated over 35% in the past decade, while the US dollar index (DXY) increased by 28.35%. This is not only an Australian dollar case; major currencies like the euro, yen, and Canadian dollar also showed a depreciation trend against the dollar, reflecting that the global economy has entered a sustained strong dollar cycle.

The fundamental reasons for the AUD’s weak performance are due to multiple factors acting simultaneously. First, US tariff policies have impacted global trade, leading to declines in raw material exports (metals, energy), directly weakening the AUD’s foundation as a commodity currency. Second, the US-Australia interest rate differential remains difficult to reverse—Australia’s domestic economic growth has slowed, and asset attractiveness has decreased, while the US economy remains resilient, maintaining higher interest rates. Lastly, even if the AUD experiences short-term rebounds, the market lacks genuine bullish confidence; whenever the exchange rate approaches previous highs, selling pressure increases significantly.

Three Key Drivers of AUD Trends

To understand the future movement of the AUD, investors need to focus on the following three dimensions:

First, RBA Monetary Policy and Interest Rate Differential Rebuilding

The Reserve Bank of Australia (RBA) has a cash rate of about 3.60%, with market expectations of potential rate hikes in 2026. If inflation remains sticky and the employment market stays resilient, the RBA’s hawkish stance will help the AUD rebuild its interest rate advantage over the dollar. Conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly. The interest rate differential is the core attraction of the AUD as a high-yield currency and a key factor in determining whether it can strengthen in the medium to long term.

Second, China’s Economy and Commodity Price Cycles

Australia’s export structure is highly dependent on iron ore, coal, and energy, making the AUD essentially a commodity currency, with Chinese demand being the most critical variable. When China’s infrastructure and manufacturing activities rebound, commodity prices tend to strengthen in tandem, and the AUD will quickly reflect this in the exchange rate. However, if China’s recovery momentum is insufficient, even a short-term rebound in commodities may lead to a “rise and fall” pattern in the AUD.

Third, US Dollar Trends and Global Risk Appetite

From a capital flow perspective, the Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cut environment, a weakening dollar usually benefits risk assets, and the AUD benefits accordingly; but if risk aversion rises and capital flows back into the dollar, the AUD may face pressure even if its fundamentals are stable.

How Do Major Institutions View the AUD Outlook?

Regarding the future trend of the AUD, market institutions show clear divergence.

Morgan Stanley remains relatively optimistic, expecting the AUD/USD to reach 0.72 by the end of 2025, mainly supported by the RBA’s hawkish stance and rising commodity prices.

Traders Union’s statistical model indicates 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.

UBS adopts a more conservative view, believing that despite Australia’s economic resilience, uncertainties in global trade and potential changes in Fed policy could limit the AUD’s upside, with the exchange rate expected to stay around 0.68 by year-end.

The Commonwealth Bank of Australia (CBA) offers a cautious outlook, suggesting that the recent short-term rebound in the AUD may be temporary. They forecast the AUD/USD to peak around March 2026 but possibly decline again by the year’s end.

Outlook for the AUD in 2026 and Beyond

Overall, for the AUD to achieve a genuine medium- to long-term appreciation, three conditions must be met simultaneously: the RBA maintaining a hawkish stance, a substantial improvement in Chinese demand, and the US dollar entering a structural weakening phase. Meeting only one of these conditions is more likely to result in the AUD remaining within a range rather than a sustained upward trend.

In the short term (first half of 2026), the AUD is likely to fluctuate between 0.68 and 0.70, influenced by Chinese economic data and US non-farm payroll figures. Given Australia’s relatively solid fundamentals and the RBA’s hawkish stance, a significant depreciation of the AUD seems unlikely; however, due to the structural advantage of the US dollar, a rapid rise to historical highs is also improbable.

Long-term factors supporting the AUD include Australia’s resource export competitiveness and a commodity cycle rebound, but downside risks include global trade uncertainties and the potential re-strengthening of the US dollar.

The Relationship Between the AUD and TWD

It is worth noting that the AUD and TWD have a certain correlation. As major Asian economies, Taiwan’s economy is closely linked to commodity imports, and the AUD, as a commodity currency, indirectly influences the TWD’s performance. When the AUD weakens, it often reflects weak global demand and can pressure the TWD; conversely, the opposite is also true. Therefore, monitoring the AUD’s movements can provide useful insights into the medium-term trend of the TWD.

Summary

The AUD’s characteristics as a commodity currency remain prominent, with strong correlations to 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 the risk of a US dollar rebound will limit the upside and increase volatility.

Although exchange rate fluctuations are rapid and difficult to predict precisely, the AUD’s high liquidity, cyclical volatility, and clear economic structure make medium- to long-term trend assessments relatively manageable. Investors should focus on the interactions among RBA policy developments, Chinese economic data, and the US dollar index, as these three factors will directly determine the AUD’s performance in 2026 and beyond.