The Australian dollar is on a strong upward trend! It has gained 8.4% since the beginning of the year, driven by multiple factors, and there is still potential through 2026.

Recently, the AUD has performed well in the currency market. As of December 30, the AUD/USD was at 0.6706, up 8.4% from the start of the year, reaching a 14-month high. Behind this rally are the shift in the Reserve Bank of Australia's policy and the global commodities bull market.

**Divergence in US and Australian Policies as a Main Driver**

The latest hawkish signals from the Reserve Bank of Australia (RBA) have become a key catalyst for the AUD's appreciation. Due to a rebound in local inflation data, the December meeting minutes signaled the possibility of rate hikes next year. The market widely expects the RBA to start a rate hike cycle by 2026. In contrast, the Federal Reserve remains in a rate-cutting mode, with expectations of two more cuts in 2026. The divergence in monetary policies between the two major central banks directly supports the AUD's rise.

Rising commodity prices boost economic outlook. As a major global exporter of commodities, Australia has recently benefited from record-high prices for gold, silver, copper, and other commodities. Increased export revenues imply stronger economic growth prospects, further reinforcing investors' willingness to buy the AUD.

**General Optimism for the Future**

International banks are optimistic about the AUD's outlook. Deutsche Bank believes that the AUD's interest rate advantage within the G10 currency basket will continue to widen, expecting the AUD/USD to rise to 0.69 by Q2 2026 and reach 0.71 by the end of the year. National Australia Bank is even more optimistic, forecasting the RBA to raise rates twice in 2026. Under this scenario, the AUD/USD could rise to 0.71 in Q2 2026 and further to 0.72 in Q3.

It is worth noting that the AUD/CNY exchange rate, an important cross-currency pair in the Asia-Pacific region, will also be affected by the AUD's appreciation. As the AUD remains strong, related bilateral exchange rates may also face adjustments.

**Two Key Events to Watch**

Whether the AUD can maintain its strength depends on upcoming key data releases. On January 28, Australia will release Q4 CPI data, which will directly influence market expectations for the RBA's rate hike pace. Then, on February 3, the RBA's interest rate decision will be a focal point. Data and decisions at these two moments could recalibrate the AUD's appreciation prospects, so investors should stay closely tuned.