AUD future trend analysis: How commodity currencies seek breakthroughs during a strong dollar cycle

The Australian dollar, as the fifth-largest currency by global trading volume, often influences capital flows across the Asia-Pacific region. However, when we extend the time horizon to examine the past decade of AUD/USD performance, a fascinating phenomenon emerges: despite Australia’s relatively solid economic fundamentals, the AUD has been in a prolonged depreciation trend. What does this underlying trend truly reflect?

The Fundamental Causes of a Decade of AUD Weakness

Looking back to early 2013, the AUD/USD exchange rate briefly topped 1.05. Over the following ten years, the AUD depreciated by more than 35%. During the same period, the US Dollar Index (DXY) rose by 28.35%, while major currencies like the euro, yen, and Canadian dollar also depreciated against the dollar, indicating we are in a broad-based strong dollar cycle.

The AUD’s weakness is not an isolated phenomenon but reflects structural challenges on three levels. First, Australia’s export structure is heavily reliant on commodities—iron ore, coal, and energy account for a significant share. When China’s economic growth slows and infrastructure investment declines, demand for raw materials diminishes, making the AUD’s “commodity currency” attribute particularly vulnerable.

Second, Australia’s attractiveness to international hot money in the past was mainly due to interest rate differentials—specifically, the Reserve Bank of Australia (RBA) maintained significantly higher rates than the US Federal Reserve. However, with the US initiating aggressive rate hikes in 2022, this interest rate advantage has gradually eroded. Third, US tariff policies and escalating global trade frictions have further dampened Australia’s raw material export prospects, leading to a continued decline in long-term capital allocation to the AUD.

Three Key Factors That Will Determine the AUD’s Future Trajectory

To assess whether the AUD can reverse its downward trend, we need to observe changes across three dimensions:

First is the direction of RBA monetary policy. The RBA’s current cash rate is about 3.60%. Market expectations suggest there is still potential for rate hikes into 2026, with Commonwealth Bank of Australia (CBA) estimating a peak around 3.85%. If inflation remains sticky and the labor market stays strong, the RBA’s hawkish stance could help rebuild the AUD’s interest rate differential against the dollar; conversely, if rate hike expectations diminish, the AUD will lose an important support.

Second is the actual pace of China’s economic recovery. The AUD is essentially a commodity currency, closely tied to China’s manufacturing activity. When Beijing implements effective stimulus measures and infrastructure investment rebounds, iron ore prices tend to rise in tandem, and the AUD often responds quickly. However, if China’s recovery remains limited, even short-term commodity price rebounds may lead to a “spike and fall” pattern in the AUD, reflecting fragility.

Third is the US dollar cycle and global risk sentiment. The Federal Reserve’s policy shifts remain central to the forex market. In a rate-cut environment, the dollar typically weakens, benefiting high-risk currencies like the AUD. But if risk aversion increases and capital flows back into the dollar, the AUD could face downward pressure even if its fundamentals are stable.

Market Consensus and Divergence on the AUD’s Future

Regarding the AUD’s outlook, major international institutions have divergent forecasts. Morgan Stanley projects the AUD/USD could rise to 0.72 by the end of 2025, reasoning that the RBA’s hawkish stance combined with strengthening commodity prices supports this. 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 in 2027.

However, UBS adopts a more conservative view, citing ongoing global trade uncertainties and potential shifts in Fed policy as factors that could limit AUD gains, expecting the exchange rate to stay around 0.68 by year-end. CBA economists also warn that the recent rebound in the AUD may be short-lived, predicting it will peak around March 2026 before possibly declining again.

The core consensus among these views is: the AUD has short-term recovery potential, but a sustained medium- to long-term trend requires more robust macroeconomic conditions. Relying on a single positive factor is unlikely to generate a durable upward momentum.

Reasonable Expectations for the AUD’s Future

Based on various analyses, the AUD is likely to fluctuate between 0.68 and 0.70 in the first half of 2026. Short-term volatility will be driven mainly by Chinese economic data and US non-farm payroll figures. In the medium term, Australia’s solid fundamentals and the relatively hawkish stance of the RBA provide a basis for upward movement, but structural US dollar advantages remain, making it unlikely for the AUD to surge unilaterally.

Resistance levels are around 0.67; breaking above would require an unusual combination of avoiding US recession while the dollar weakens. Support levels depend on resource exports and the global commodities cycle—core aspects of the AUD’s pricing logic as a commodity currency.

Conclusion

The key question for the AUD’s future is whether a rebound can evolve into a sustained trend. In the short term, the RBA’s hawkish stance and the resilience of raw material prices will provide support. However, in the medium to long term, global economic uncertainties and the risk of a dollar rebound pose risks that could limit upside and increase volatility. While forex markets are inherently difficult to predict precisely, the AUD’s high liquidity and cyclical volatility make macroeconomic fundamentals a relatively reliable basis for medium- to long-term directional judgments. Investors should closely monitor Chinese economic data, RBA policy signals, and US dollar trends to establish reasonable risk expectations.