Why is the Australian dollar continuing to weaken? Can this rebound reverse a decade-long downturn? AUD trend analysis and outlook forecast

The Status of the Australian Dollar in the Global Forex Market

The Australian dollar is among the top five currencies by trading volume worldwide, and the AUD/USD currency pair ranks in the top five most actively traded pairs globally. This status offers advantages such as ample liquidity and low transaction costs, enabling investors to execute short-term arbitrage or medium- to long-term strategies more conveniently.

It is worth noting that the AUD has long been regarded as a typical high-yield currency, often targeted by arbitrage traders and hot money flows. However, when looking at a longer time horizon, the overall performance of the AUD over the past decade has been quite weak, with rebounds occurring only during specific periods.

The most notable example is during the COVID-19 pandemic in 2020. At that time, Australia’s pandemic control measures were relatively effective, demand for raw materials like iron ore in Asia remained strong, and the Reserve Bank of Australia’s policies aligned, collectively driving the AUD/USD exchange rate up by approximately 38% within a year. However, for most of the subsequent period, the AUD remained in consolidation or downward trends.

Entering the second half of 2025, iron ore and gold prices rebounded, and the Federal Reserve’s rate-cut cycle attracted capital into risk assets, pushing the AUD higher. The AUD/USD briefly touched 0.6636, and throughout 2025, the AUD appreciated by about 5-7%. Yet, on a longer-term scale, the AUD still faces structural weakness.

Why Is the AUD Still Struggling? Why Commodity Rebound and Dollar Weakness Cannot Support the AUD

Looking back over the past decade, the AUD/USD has fallen by over 35%. During the same period, the US dollar index rose by 28.35%, and major currencies like the euro, yen, and Canadian dollar also depreciated against the dollar. This is not an isolated phenomenon for the AUD but reflects a common trend of a strong dollar cycle across the global markets.

From technical and fundamental perspectives, the AUD remains relatively disadvantaged. This explains why, even during rebounds, the AUD struggles to establish an upward trend.

Key historical periods for AUD/USD:

Whenever the AUD approaches previous highs, selling pressure increases significantly, indicating market confidence in the AUD’s outlook is severely lacking.

Analysts point out several core pressures: US tariff policies impact global trade flows, declines in raw material exports (precious metals, energy) weaken the appeal of the AUD as a commodity currency. The US-Australia interest rate differential struggles to reverse, Australia’s domestic economic growth stagnates, and asset attractiveness to foreign capital diminishes.

In other words, the current state of the AUD is “rebounding but lacking direction.” Without internal growth momentum and interest rate advantage, the AUD’s movements are more influenced by external factors rather than its fundamentals, which is the fundamental reason markets remain cautious about the AUD.

Three Key Indicators to Track the AUD’s Trend

To judge the medium- to long-term bullish or bearish reversals of the AUD, investors should closely monitor the following three decisive factors:

1. The Reserve Bank of Australia’s monetary policy—whether the interest rate differential regains an advantage

The AUD is considered a high-yield currency, and its investment appeal heavily depends on the interest rate spread. Currently, the RBA’s cash rate is about 3.60%, and market expectations for 2026 suggest possible rate hikes, with the Commonwealth Bank of Australia forecasting a peak around 3.85%.

If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA will help the AUD rebuild its interest rate advantage; conversely, if rate hike expectations fade, the AUD’s support will weaken significantly.

( 2. China’s economic performance and commodity prices—external drivers for the AUD

Australia’s export structure is concentrated in iron ore, coal, and energy, making the AUD essentially a commodity currency, with China’s demand being the most critical variable.

When China’s infrastructure and manufacturing investments pick up, iron ore prices tend to rise in tandem, and the AUD exchange rate quickly reflects this; but if China’s recovery is weak, even a short-term commodity rebound may be followed by an immediate decline in the AUD.

) 3. The US dollar cycle and global risk sentiment—drivers of capital flows

The Federal Reserve’s policy cycle remains a key factor in the global forex market. In a rate-cut environment, a weaker dollar generally benefits risk currencies, and the AUD benefits relatively; but if risk aversion increases and capital flows back into the dollar, the AUD may weaken even if its fundamentals are unchanged.

Currently, energy prices are underperforming expectations, and signs of weak global demand are evident. Investors tend to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

Core conclusion: For the AUD to establish a genuine medium- to long-term bull trend, three conditions must be met simultaneously—RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural decline in the dollar. If only one or two are present, the AUD is more likely to oscillate within a range rather than trend upward unilaterally.

Future Outlook for the AUD: Can Rebounds Turn into a Trend?

The key question for the AUD’s future is whether “recovery can evolve into a trend.” The market consensus is that the AUD has short-term recovery potential, but to reignite a strong bullish trend, clearer macro fundamentals are needed.

Different institutions have varying outlooks:

Morgan Stanley expects the AUD/USD to reach 0.72 by the end of 2025. This view is based on the possibility that the RBA maintains a hawkish stance and commodity prices strengthen.

Traders Union’s modeling suggests an average expectation of about 0.6875 by the end of 2026 (range 0.6738-0.7012), rising further to 0.725 by the end of 2027, emphasizing Australia’s resilient labor market and a recovery in commodity demand. The common basis for these optimistic forecasts is that if the US economy soft-lands and the dollar index declines, it will favor commodity currencies like the AUD.

UBS adopts a more cautious stance. They believe that despite Australia’s economic resilience, uncertainties in global trade and potential changes in Fed policy will limit the AUD’s upside, with a forecast of around 0.68 at year-end.

The Reserve Bank of Australia’s economic team recently issued a more conservative outlook: the AUD’s recovery may be short-lived, predicting a peak around March 2026, followed by a possible decline by year-end. Some Wall Street analysts also 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.

Personal view: In the first half of 2026, the AUD is likely to fluctuate within the 0.68-0.70 range, influenced by Chinese data and US non-farm payroll reports. The AUD is unlikely to crash sharply because of Australia’s solid fundamentals and the relatively hawkish stance of the RBA; but it also won’t surge to 1.0, given the structural advantage of the dollar. Short-term risks mainly stem from Chinese economic data, while long-term positives include a recovery in Australia’s resource exports and commodity cycles.

Key Points in Analyzing the AUD’s Trend

As a “commodity currency” heavily linked to resource exports like copper, iron ore, and coal, the AUD’s fundamental attribute remains prominent.

Overall market analysis suggests that in the short term, the hawkish stance of the RBA and strong raw material prices will provide support; but in the medium to long term, attention should be paid to global economic uncertainties and the risk of a rebound in the dollar, which could limit the AUD’s upside and increase volatility.

Although forex market fluctuations are rapid and predicting exchange rates precisely is challenging, the AUD’s liquidity, volatility patterns, and economic structure make identifying medium- to long-term trends more manageable.

The difficulty in analyzing the AUD’s trend lies not in a lack of data but in how to connect the interactions among interest rate policies, commodity cycles, and the dollar’s direction. Understanding these relationships enables better anticipation of the AUD’s turning points in bullish or bearish directions.