Can the medium- to long-term trend of the Australian dollar be reversed? Key factors and 2026 outlook

The Australian dollar, ranked among the top five currencies globally by trading volume (alongside the US dollar, euro, Japanese yen, and British pound), attracts significant investor interest due to its active trading and liquidity. The “AUD/USD” currency pair, characterized by low spreads and high liquidity, has become an ideal target for short-term trading and medium- to long-term allocation.

However, the reality is that, as a well-known high-yield currency, the AUD has been favored by carry traders for years, but its overall performance over the past decade has been quite weak. Aside from a special rebound during the 2020 pandemic (where the AUD/USD rose 38% within a year), most of the time the AUD has been consolidating or trending downward.

AUD Trend Analysis shows that, starting from the 1.05 level in early 2013, the AUD has depreciated over 35% over ten years, while the US dollar index has risen 28.35%. This reflects a comprehensive strong dollar cycle, with the euro, yen, and Canadian dollar also showing a weakening trend against the dollar.

Why Is the AUD Struggling to Shake Off Weakness? Three Major Pressure Factors Explained

To understand why the AUD has performed poorly over the long term, it is necessary to analyze from three dimensions: commodities, interest rate differentials, and the economy:

Dual Challenge of Commodity Demand and China’s Cycle

Australia’s export structure is highly dependent on iron ore, coal, and energy, making the AUD essentially a commodity currency. When China’s economy is strong, demand for raw materials boosts commodity prices, and the AUD typically benefits quickly; however, when China’s recovery is sluggish, even short-term rebounds in commodities often lead to a “spike and retreat” for the AUD. Weak Chinese economic recovery in 2023-2024 has directly impacted the AUD’s status as a commodity currency.

Diminishing Interest Rate Advantage

The Reserve Bank of Australia (RBA) cash rate is about 3.60%, and the once-attractive interest rate differential no longer holds the same appeal. The interest rate advantage between the US and Australia has been difficult to reverse; sluggish domestic economic growth and declining asset attractiveness have significantly reduced the inflow of hot money.

US Tariffs and Deteriorating Global Trade Environment

US trade protectionism policies have disrupted global trade patterns, putting downward pressure on raw material exports and directly weakening the foundation supporting the AUD.

Can the AUD Rebound to Strength? Three Key Indicators Must All Be Satisfied

The market generally believes that a genuine medium- to long-term reversal of the AUD requires simultaneous fulfillment of three conditions:

First: RBA Rebuilds Hawkish Stance and Interest Rate Advantage

If inflation remains sticky and the employment market stays resilient, the Australian central bank may raise interest rates again by 2026, with the peak rate possibly reaching 3.85%. This would directly enhance the AUD’s interest rate differential attractiveness. Conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly.

Second: Substantial Improvement in China’s Economy

If China’s infrastructure and manufacturing activities return to expansion, iron ore prices tend to rise in tandem, and the AUD usually reflects this change quickly. This is the core engine of the AUD as a commodity currency.

Third: The US Dollar Enters a Structural Weakening Phase

In a Fed rate-cut environment, the dollar typically weakens, benefiting risk currencies like the AUD. However, if risk aversion rises and capital flows back into the dollar, the AUD may face pressure even if its fundamentals are unchanged.

Having only one or two of these conditions met will likely result in the AUD remaining in a range-bound oscillation rather than a one-way rally.

2026-2027 AUD Outlook: Institutional Forecasts Compared

Regarding the future prospects of the AUD, market institutions show clear divergence:

Morgan Stanley’s Optimistic Scenario

The bank expects the AUD/USD to rise to 0.72 by the end of 2025, supported by the RBA maintaining a hawkish stance and rising commodity prices.

Traders Union Model’s Moderate Outlook

Statistical models project 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, driven by a strong Australian labor market and a recovery in commodity demand.

UBS’s Conservative Position

UBS believes that, despite resilience in Australia’s economy, 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. This more cautious outlook reflects concerns over external risks.

CBA’s Revised Forecast

Recent cautious analysis from Commonwealth Bank suggests that the AUD’s recovery may be only a short-term phenomenon. They forecast the AUD/USD to peak around March 2026 but possibly decline again by year-end, indicating medium-term adjustment pressures.

Wall Street Warnings

Some analysts warn that if the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break through 0.67, with limited upside potential.

Core Perspective on AUD Trend Analysis

Based on assessments from various institutions, the AUD is likely to oscillate between 0.68 and 0.70 in the first half of 2026. The key variables are fluctuations in China’s macroeconomic data and US non-farm payrolls. In the medium term, a sharp collapse of the AUD seems unlikely because Australia’s fundamentals remain stable, and the relatively hawkish stance of the RBA provides support; however, a direct rise to 1.0 is also improbable, as structural dollar strength persists.

Short-term pressures mainly stem from uncertainties in China’s economic data, while long-term bullish factors include resource exports and a commodity cycle recovery.

As one of the most liquid currencies, the AUD exhibits relatively predictable volatility patterns, making medium- to long-term trend judgments more manageable. Although the forex market itself is highly volatile and difficult to predict precisely, Australia’s economic structure lends some analytical clarity to its exchange rate movements.

Practical Strategies for Participating in AUD Investment

For investors interested in trading the AUD, forex margin trading offers a flexible approach. This mode allows for both long and short positions, supports leverage from 1-200x, enabling traders to capitalize on upward trends or profit from declines. The trading threshold is relatively accessible, suitable for small and medium-sized investors.

It is important to note that forex trading is a high-risk investment. Investors should fully understand the risk of losing all funds and make decisions based on a thorough understanding of market mechanisms and their own risk tolerance.

The AUD/USD pair, with its high liquidity and clear economic drivers, provides a relatively straightforward trading target. Whether seeking short-term volatility arbitrage or medium- to long-term allocation, understanding the dynamic changes of these three key factors is fundamental to making more informed investment decisions.