Australian dollar's ten-year decline dilemma: losing interest rate advantage, sluggish commodity demand, can it truly rebound in 2026?

The Australian dollar (AUD) ranks among the top five most actively traded currencies in the global foreign exchange market. With strong liquidity and low spreads against the US dollar (AUD/USD), it is an important tool for many traders engaging in short-term operations and medium- to long-term positioning. However, despite being once regarded as a high-yield currency, its performance over the past decade has been disappointing.

Starting from the 2013 level of 1.05, the AUD/USD has depreciated by over 35% in ten years, while the US dollar index has risen by 28.35%. In comparison, major currencies such as the euro, yen, and Canadian dollar have also weakened against the dollar. During this comprehensive strong dollar cycle, the weakness of the AUD is not an isolated phenomenon but reflects deeper structural issues.

Why has the Australian dollar been persistently weak? Three fundamental reasons

The AUD’s weakness is not accidental. Over the past decade, the attractiveness of interest rate differentials has significantly declined, commodity demand has continued to weaken, and Australia’s domestic economic growth has been sluggish. These three factors together have created a difficult environment for the AUD to rebound.

First, the deterioration of the interest rate differential structure. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%, while the Federal Reserve remains at a high level. The previous advantage of interest rate spreads has greatly diminished, making carry trades less attractive for the AUD.

Second, commodity prices are unstable. Australia’s export structure is highly concentrated in bulk commodities such as iron ore, coal, and energy. When China’s economy is strong (e.g., 2009-2011), the AUD has risen close to 1.05; however, since 2023, China’s recovery has been weak, with high-level fluctuations, and demand for raw materials like iron ore has declined, directly impacting Australia’s status as a commodity currency.

Third, US trade policies and increasing global trade uncertainties. Adjustments in US trade policies have put pressure on global commodity markets, further dampening Australia’s raw material export prospects and weakening the fundamental support for the AUD.

Whenever the AUD approaches previous high zones, market selling pressure increases significantly, reflecting limited confidence in the currency. In the absence of clear growth momentum and interest rate advantages, the AUD’s movements are more susceptible to external factors rather than driven by its own fundamentals.

Three key observations on the medium- to long-term trend of the AUD

Historical experience shows that the AUD’s trend is influenced by multiple factors. To grasp the bullish or bearish turning points, investors should focus on three core variables:

First: RBA interest rate policy and interest rate differential structure

The monetary policy of the RBA directly influences the attractiveness of interest rate spreads. Currently, the market expects the RBA may raise rates again by 2026, with the Commonwealth Bank of Australia forecasting a peak rate of around 3.85%. If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA could help the AUD rebuild its interest rate advantage; conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly.

Second: China’s economy and commodity price cycles

The AUD is fundamentally a commodity currency, with Chinese demand being the most critical variable. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen simultaneously, and the AUD usually reflects this quickly in the exchange rate. Conversely, if China’s recovery momentum is insufficient, even short-term commodity rebounds may not translate into a strong AUD. In the second half of 2025, commodity prices surged, and the AUD/USD briefly rose to 0.6636, appreciating about 5-7% in the short term. Whether this rebound can be sustained depends largely on the actual improvement in Chinese demand.

Third: US dollar trend and global risk sentiment

From a capital flow perspective, the Federal Reserve’s policy cycle remains central to the global FX 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 may face downward pressure even if its fundamentals are not deteriorating. Recent energy prices and global demand remain cautious, with investors favoring safe-haven assets over cyclical currencies like the AUD.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA returning to 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 remain in a range-bound oscillation rather than trend upward unilaterally.

Outlook for the AUD beyond 2026

Market forecasts for the AUD’s future performance show significant divergence.

Optimistic forecasts: Morgan Stanley predicts the AUD/USD could rise to 0.72 by the end of 2025, mainly based on the possibility of the RBA maintaining a hawkish stance and a strengthening of commodity prices. According to Traders Union’s statistical model, the average for 2026 is around 0.6875 (range 0.6738-0.7012), with further appreciation to 0.725 by the end of 2027, emphasizing Australia’s strong labor market and the recovery in commodity demand.

Conservative views: UBS believes that despite Australia’s resilient economy, uncertainties in global trade and potential changes in the Fed’s policy could limit the AUD’s gains, with the exchange rate expected to stay around 0.68 by year-end. Economists at the Commonwealth Bank of Australia are more cautious, suggesting that the AUD’s recovery may be temporary, predicting a peak around March 2026, followed by a possible decline by year’s end. Some Wall Street analysts also warn that if the US maintains a super-strong dollar due to interest rate differentials, the AUD will struggle to break through resistance at 0.67.

Overall assessment: In the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese data and US non-farm payroll fluctuations. The Australian economy remains solid, and the RBA’s relatively hawkish stance provides short-term support; however, structural US dollar strength persists, limiting the AUD’s upside potential. Short-term pressures mainly stem from China’s economic data, while long-term positives include Australia’s resource exports and commodity cycles.

Key considerations for investing in the AUD

As a commodity-exporting currency, the AUD is highly correlated with prices of raw materials like iron ore and coal. The FX market is volatile and difficult to predict precisely, but the AUD’s high liquidity, strong volatility patterns, and distinct economic structure make medium- to long-term trend judgments relatively easier.

In the short term, a hawkish RBA and strong raw material prices will provide support. However, in the medium to long term, investors should remain cautious of global economic uncertainties and the possibility of a US dollar rebound, which could limit the AUD’s upside and lead to more oscillations. Considering forecasts from major institutions and market fundamentals, the AUD’s performance in 2026 is more like a “rebound and relief tug-of-war” rather than a straightforward upward trend.