The Australian dollar remains weak; exploring the core logic behind the currency dilemma

The Australian dollar, as the fifth most traded currency globally, was once regarded as a “high-yield currency” synonym. However, when observing over a longer time scale, its performance over the past decade has been disappointing—AUD/USD has depreciated by over 35%, while the US dollar index has risen by 28.35%. What underlying factors are hidden behind this?

Reasons for AUD Decline: The Beginning of a Structural Recession

From early 2013 when it was at 1.05, the AUD has fallen steadily to the 0.66 range. This is not just short-term volatility but a systemic decline.

The first key reason is the long-term weakness in commodity demand. Australia’s economy heavily relies on exports of iron ore, coal, and energy, with pricing power held within the global supply and demand balance. Although there was a rebound of about 38% during the 2020 pandemic due to strong Asian demand for iron ore, this was followed by slowing Chinese economic growth and a downturn in manufacturing, weakening the demand for raw materials. While commodity prices rose again in 2025, this rebound has not fully reversed the long-term downward trend.

The second reason is the loss of interest rate differential advantage. The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%, with market expectations of possibly raising it again to 3.85% in 2026. However, the Federal Reserve’s policy stance is equally critical—when US rates remain high or have limited room to cut, the interest rate advantage of Australia diminishes, greatly reducing the previous arbitrage appeal. The halo of high-yield currencies fades, and market demand for AUD naturally declines.

The third reason stems from a shift in global risk sentiment. In risk-off environments, capital tends to flow back into safe-haven assets like the US dollar and gold, while AUD, as a cyclical currency, is suppressed. Even if Australia’s fundamentals remain stable, market sentiment shifts can still exert downward pressure on the AUD.

Why Is the AUD Difficult to Rebound? Three Structural Dilemmas

Although the AUD/USD briefly rose to 0.6636 in 2025, appreciating about 5-7% within the year, longer-term, such rebounds tend to lack sustainability. Whenever the AUD approaches previous highs, selling pressure increases, reflecting market caution about its prospects.

US tariff policies further suppress Australia’s commodity currency characteristics. Uncertainty in global trade prospects, especially for metals, energy, and raw materials, directly threaten Australia’s main export pillars.

The relatively weak domestic Australian economy also limits the AUD’s attractiveness. Compared to the relatively strong US economy, the proportion of Australian assets in global portfolios has decreased, further weakening capital inflows.

The ongoing strong dollar cycle is a fundamental backdrop. In this environment, not only does the AUD weaken, but major currencies like the euro, yen, and CAD also face pressure against the dollar. This indicates that Australia’s predicament is not isolated but a reflection of the reshaping of the global currency landscape.

Three Dimensions to Observe the Medium-Long Term Trend of AUD

To assess whether the AUD has the potential for sustained appreciation, investors should focus on these three factors:

Factor 1: RBA interest rate policy and interest rate differentials. The AUD has long been viewed as a high-yield currency, highly dependent on the AUD/USD spread. If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA will help rebuild the AUD’s interest advantage; conversely, if rate hikes falter, the AUD’s support will weaken. The RBA projects a peak rate possibly reaching 3.85%. If this materializes and the US cuts rates faster, widening the interest differential could become a key support for the AUD.

Factor 2: The linkage between China’s economy and commodity prices. Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency. China’s demand is the core variable—when infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen, and the AUD usually reflects this quickly; if China’s recovery falters, even short-term commodity rebounds may lead to a “spike and retreat” pattern in the AUD.

Factor 3: The US dollar trend and global risk sentiment. The Fed’s policy cycle remains central to the global FX market. In a rate-cutting environment, a weaker dollar generally benefits risk currencies like the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD can still face downward pressure even if fundamentals are stable.

For the AUD to break into a genuine medium-long-term bull trend, three conditions must align: the RBA adopts a hawkish stance again, China’s demand substantively improves, and the dollar enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain range-bound rather than trend upward unilaterally.

Market Divergence: Optimism vs. Caution

Major institutions have differing views on the AUD’s future, reflecting uncertainty.

Morgan Stanley forecasts that by the end of 2025, the AUD/USD could rise to 0.72, supported by the RBA’s hawkish stance and rising commodity prices. The Traders Union’s models suggest 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 strong Australian labor markets and commodity demand recovery.

UBS’s more conservative view notes that despite resilience in Australia’s economy, global trade uncertainties and potential Fed policy shifts could limit upside, expecting the exchange rate to stay around 0.68 by year-end. CBA Economists offer a cautious outlook, suggesting the AUD’s recovery may be temporary, with a peak around March 2026, then possibly retreating by the end of 2026.

From a 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 won’t crash sharply due to solid fundamentals and a relatively hawkish RBA, but it’s unlikely to surge to 1.0 given the structural dollar strength. Short-term pressures mainly stem from Chinese data, while long-term positives include Australia’s resource exports and commodity cycles.

Deep Reflection on the Reasons for AUD Decline

The core of Australia’s predicament is whether a rebound can turn into a sustained trend. Short-term, there is room for recovery, but returning to a strong bull phase requires clearer macro conditions.

From a medium-long-term perspective, the AUD resembles a “rebound but lacking a trend” currency. Without clear growth momentum and interest rate advantages, its movements are more influenced by external factors rather than fundamentals. US tariff policies, China’s economic recovery, and subtle Fed policy shifts can all significantly impact the AUD.

This is why the market remains cautious about the AUD— in an environment lacking certainty, investors tend to avoid potential risks. The future of the AUD depends on the combined effects of these external variables rather than a single dominant factor.

Risks in Investing in AUD

For investors interested in trading AUD, forex margin trading is a common way to gain exposure. AUD/USD, as one of the top five most traded currency pairs, offers high liquidity and predictable volatility, making medium-long-term trend analysis relatively accessible. Investors can go long or short, leverage to amplify gains, and the low entry barrier makes it suitable for small to medium capital participation.

However, all investments carry risks. Forex trading is high-risk; investors may lose all their capital. Although the liquidity and volatility of the AUD make it relatively easier to analyze, predicting exchange rate movements is inherently difficult, and most models have limited short-term effectiveness. Investors should fully understand the complexity behind the AUD’s decline and carefully assess their risk tolerance before trading.

Summary: The Balance of Bull and Bear for AUD

As a “commodity currency” of a resource-exporting country, the AUD’s link to iron ore, coal, and other raw material prices remains strong. In the short term, hawkish RBA policies and strong commodity prices can provide support; but in the medium to long term, global economic uncertainties and potential dollar rebounds will limit upside and increase volatility.

The outlook for the AUD is neither purely bullish nor persistently bearish. Instead, it remains relatively balanced but volatile under multiple constraints. Understanding the multi-dimensional reasons behind the AUD’s decline is key to judging its future trajectory.