The rebound path after the Australian dollar exchange rate hit its historical low: what is the future trend?

The Australian dollar (AUD) is one of the top five major currencies by global trading volume. Among them, the AUD/USD pair is known for its high liquidity and tight spreads, attracting investors worldwide for short-term trading and medium- to long-term positioning. However, from a ten-year perspective, this once high-yield currency has underperformed, especially as the AUD exchange rate’s historical low continues to cast a shadow over the market.

Over 30% Depreciation of the AUD in Ten Years: Why Did the Former High-Yield Currency Fall Out of Favor?

Starting from early 2013 at around 1.05, over the past decade until 2023, the AUD against the USD has depreciated by over 35%, while the US dollar index has risen by 28.35%. This is not unique to the AUD— the euro, yen, and Canadian dollar have also weakened against the dollar, reflecting a global shift into a prolonged “Strong Dollar Cycle.”

The divergence in AUD performance hinges on three key periods:

2009-2011 was the golden era for the AUD. China’s robust economic recovery boosted commodity demand, and the Reserve Bank of Australia (RBA) maintained significantly higher interest rates than the US, pushing the AUD/USD close to 1.05.

2020-2022 saw a rebound opportunity. During the pandemic, Australia’s relatively stable pandemic response and a global commodities bull market (iron ore reaching new highs) caused the AUD to briefly break above 0.80. But this rally was short-lived.

2023-2024 has been a period of stagnation. China’s economic recovery has been weak, with high-level volatility, narrowing interest rate differentials, and sustained pressure on the AUD, bringing it closer to its historical lows.

Market analysts attribute the main difficulties to four factors: US tariff policies impacting global trade, declining Australian raw material exports weakening its commodity currency status, the inability to reverse the interest rate differential, and sluggish domestic economic growth reducing asset attractiveness. Consequently, whenever the AUD approaches previous highs, selling pressure increases, and confidence in the currency remains limited.

The Three Forces Behind the AUD Rebound in 2025

Entering the second half of 2025, market conditions have shown signs of change. Prices of iron ore and gold surged significantly, and the Fed’s rate cuts prompted capital flows into risk assets, pushing the AUD/USD briefly to 0.6636, with an annual gain of about 5-7%. However, on a longer-term scale, the AUD’s trend remains relatively weak, far from escaping its historical lows.

Three critical factors will determine the future direction of the AUD:

Factor 1: The RBA’s Hawkish Stance

The RBA’s cash rate is currently around 3.60%. Market expectations suggest a possible rate hike again in 2026, with the Commonwealth Bank forecasting a peak of around 3.85%. If inflation remains sticky and employment stays resilient, the RBA’s hawkish stance could restore the interest rate advantage for the AUD; otherwise, expectations of rate hikes will weaken, reducing the currency’s support.

Factor 2: China’s Economy and Commodity Cycles

Australia’s export structure is highly concentrated in iron ore, coal, and energy. The AUD is essentially a commodity currency, with Chinese demand being the core variable. When China’s infrastructure and manufacturing activities rebound, iron ore prices tend to strengthen, quickly reflecting in the AUD exchange rate. Conversely, if China’s recovery falters, even a short-term commodity rally may lead to a quick pullback in the AUD.

Factor 3: US Dollar Trends and Global Risk Sentiment

The Fed’s policy cycle remains central to the global FX market. In a rate-cut environment, a weakening dollar generally benefits risk currencies like the AUD. However, if risk aversion rises and capital flows back into the dollar, the AUD may face downward pressure even if its fundamentals are stable. Recent energy prices and global demand remain uncertain, leading investors to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside potential.

For the AUD to truly enter a medium- to long-term bullish phase, three conditions must be met simultaneously: the RBA adopts a hawkish stance again, Chinese 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 in a range-bound or sideways pattern rather than a clear upward trend.

Diverging Forecasts from Major Institutions

Regarding when the AUD will break free from its historical lows and regain strength, opinions vary:

Optimistic: Morgan Stanley expects the AUD/USD to rise to around 0.72 by the end of 2025, supported by the RBA’s hawkish stance and rising commodity prices.

Moderate: The Traders Union’s statistical model projects 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, citing strong Australian labor markets and commodity demand recovery.

Cautious: UBS believes that despite resilient domestic economic conditions, global trade uncertainties and potential Fed policy shifts could limit gains, with the AUD around 0.68 by year-end.

Very cautious: Economists at the Commonwealth Bank recently indicated that the AUD’s recovery might be short-lived, expecting a peak around March 2026, followed by a possible decline.

Other Wall Street analyses warn that if the US avoids recession but the dollar remains super-strong, the AUD will struggle to break through resistance at 0.67.

Practical Outlook: Range Expectation for the First Half of 2026

Based on various viewpoints and fundamental analysis, the AUD is likely to oscillate between 0.68 and 0.70 in the first half of 2026. Short-term fluctuations will be mainly driven by Chinese economic data and US non-farm payroll figures. In the medium to long term, the AUD is unlikely to collapse sharply—Australia’s fundamentals remain relatively stable, and the RBA’s hawkish stance provides support. However, it is also unlikely to surge to 1.0, given the structural advantages of the US dollar.

Short-term pressures mainly stem from China’s data performance, while long-term positives include Australia’s resource export potential and commodity cycle recovery. Although the shadow of the historic lows has faded, a return to former glory still depends on clearer macroeconomic conditions.

Conclusion: Characteristics and Investment Insights on the AUD

As a “commodity currency” of a major resource-exporting country, the AUD remains highly correlated with prices of copper, iron ore, coal, and other raw materials. While FX markets are volatile and difficult to predict precisely, the AUD’s high liquidity, strong cyclical patterns, and clear economic structure make medium- to long-term trend judgments relatively easier.

Regardless of whether the AUD hits its historic lows, investors should remember: short-term support comes from the RBA’s hawkish stance and strong raw material prices, but medium- to long-term risks include global economic uncertainties and potential US dollar rebounds, which will limit upside and may lead to increased volatility. Caution and patience are the correct approach to navigating AUD fluctuations.