The underlying reasons for the continued decline of the Australian dollar and the 2026 trend outlook

The Australian dollar (AUD) is the fifth most traded currency globally, and the AUD/USD pair is one of the most actively traded currency pairs worldwide, characterized by high liquidity and low spreads. It should be a favored target for investors. However, the reasons for the AUD’s decline are not due to a single factor but result from multiple forces acting together. Over the past decade, the AUD has generally performed weakly. Although there have been several rebounds, the overall trend of depreciation has remained difficult to reverse, reflecting deep structural adjustments in the global economy.

The AUD was once considered a high-yield currency, a common target for hot money flows and carry trades. But looking over a longer timeframe, from early 2013 when it was around 1.05, to the end of 2023 when it depreciated over 35% against the dollar, while the US dollar index (DXY) rose by 28.35%, indicates that the AUD’s decline is not an isolated phenomenon but occurs within a broad strong-dollar cycle. Other major currencies like the euro, yen, and Canadian dollar also show similar trends, but the AUD’s decline has been particularly pronounced, which is the core focus of this article.

Roots of AUD Decline: Weak Commodity Demand and Diminishing Interest Rate Differentials

The direct causes of the AUD’s decline can be summarized into three areas of underperformance: persistent low commodity prices, rapid narrowing of interest rate spreads, and insufficient domestic economic growth momentum.

The most critical factor is the “commodity currency” nature of Australia. Its export structure is highly concentrated in iron ore, coal, and energy. Changes in demand from China for these raw materials directly influence the AUD’s movement. During China’s robust recovery from 2009 to 2011, iron ore prices surged, and the AUD/USD approached nearly 1.05. But after 2023, as China’s economic recovery weakened, even short-term rebounds in commodities often resulted in the AUD “spiking and then falling back.”

The loss of interest rate advantage is another key factor. The Reserve Bank of Australia (RBA) and the Federal Reserve (Fed) have diverging monetary policy paths. Historically, Australian interest rates were significantly higher than those in the US, attracting arbitrage capital inflows that supported the AUD. As both central banks adjust their policies, the interest rate differential has shrunk rapidly, removing this upward push. Even though the RBA’s cash rate remains around 3.60%, market expectations of a prolonged hawkish stance from the Fed continue to suppress the AUD’s appreciation potential.

The third factor is the global impact of US tariff policies. US protectionist trade policies have directly hit Australia’s raw material exports, weakening the fundamental support for the AUD as a commodity currency. Meanwhile, domestic economic growth in Australia remains sluggish, and asset attractiveness is relatively low, further limiting foreign capital demand for the AUD.

Every time the AUD approaches previous highs, selling pressure increases, indicating investor confidence remains limited. From a deeper perspective, the AUD’s decline reflects Australia’s diminishing competitive advantage as a traditional commodity exporter amid slowing global growth and accelerating structural adjustments. In short, the AUD is not falling amid volatility but is declining due to structural disadvantages.

Three Core Factors Influencing AUD Trends

To forecast whether the AUD can reverse its downward trend, investors should focus on three decisive factors. Their interaction will determine the future bullish or bearish direction of the AUD.

1. RBA Monetary Policy: Can the Interest Rate Differential Be Rebuilt?

The RBA’s monetary policy is the primary support for the AUD. Currently, the cash rate is about 3.60%. Market expectations are gradually shifting toward a possible rate hike again by 2026, with Commonwealth Bank of Australia (CBA) forecasting a peak around 3.85%.

If inflation remains sticky and the labor market stays resilient, a hawkish stance from the RBA could help restore the interest rate advantage for the AUD. Conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly. This is the key pivot for whether the AUD can sustain a rebound.

2. China’s Economy and Commodity Prices: External Drivers for the AUD

As a commodity-exporting country, China’s demand is the most critical external factor. When China’s infrastructure and manufacturing activity pick up, iron ore prices tend to rise in tandem, often leading to a swift appreciation of the AUD.

However, market expectations for China’s recovery have repeatedly fallen short. Even if commodities rebound temporarily, without substantial improvement in China’s fundamentals, the AUD will struggle to sustain gains. This cyclical pattern of rebounds followed by declines has been evident in recent years.

3. US Dollar Trends and Global Risk Sentiment: Capital Flows

The Fed’s policy cycle remains central to global FX markets. In a rate-cutting environment, a weaker dollar generally benefits risk-sensitive currencies; but if risk aversion rises and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are stable.

Recent signs of softening energy prices and weak demand globally are not optimistic. Investors tend to favor safe-haven assets like the dollar over cyclical currencies like the AUD, which limits its upside potential.

In summary, for the AUD to enter a genuine medium- to long-term bull phase, three conditions must be met simultaneously: the RBA maintains or adopts a hawkish stance, China’s demand and commodity prices improve substantively, and the US dollar enters a structural weakening phase. If only one or two of these conditions are met, the AUD is more likely to remain range-bound rather than trend higher.

Outlook for the AUD: Can Rebounds Turn Into Sustained Rises?

The key to the AUD’s future is whether a rebound can evolve into a sustained trend. Most market analysts agree: while the AUD has short-term recovery potential, a true bullish reversal requires clearer macroeconomic signals.

Different institutions have varying outlooks. Morgan Stanley predicts that if the RBA maintains a hawkish stance and commodity prices stay strong, the AUD/USD could rise to around 0.72 at certain points. Traders Union’s models suggest an average of about 0.6875 by the end of 2026 (range 0.6738–0.7012), rising further to 0.725 by the end of 2027, supported by a strong Australian labor market and a recovery in commodity demand. These optimistic forecasts are based on the premise that if the US economy soft-lands and the dollar index declines, commodity currencies like the AUD will benefit.

UBS adopts a more cautious view. They believe that despite Australia’s economic resilience, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, projecting a rate around 0.68 by year-end.

Recent cautious assessments from the Reserve Bank of Australia (CBA economists) suggest that the AUD’s recovery might be temporary. They forecast a peak around March 2026, followed by a possible decline by year-end. Other Wall Street analysts warn that if the US avoids recession but the dollar remains very strong, the AUD will struggle to break through key resistance at 0.67.

From personal observation, the first half of 2026 may see the AUD oscillate between 0.68 and 0.70, influenced directly by Chinese data and US non-farm payrolls. Overall, the AUD is unlikely to crash sharply due to solid fundamentals and a relatively hawkish RBA, but it also probably won’t hit the historic highs of 1.0. The structural strength of the dollar remains intact. Short-term pressures mainly stem from weak Chinese economic data, while long-term positives include Australia’s resource exports and potential commodity cycle recovery.

Why Invest in AUD: Advantages and Risks

The AUD/USD is among the top five most traded currency pairs globally. Although currency movements are inherently unpredictable, Australia’s currency features clear characteristics and high liquidity, making its trends relatively easier to analyze.

Many investors participate via forex margin trading, which offers flexible long and short positions, often with leverage of 1-200x. This allows profit opportunities in both bull and bear markets. The low entry barrier makes it suitable for small and medium investors.

However, it’s crucial to remember that all investments carry risks. Forex trading is high-risk, and investors may lose all their capital.

Analysis and Investment Advice for the AUD

As a “commodity currency,” the AUD’s outlook remains closely tied to prices of copper, iron ore, coal, and other raw materials.

Overall, short-term support comes from the RBA’s policy stance and strong commodity prices. But medium- to long-term risks include global economic uncertainties and potential US dollar rebounds, which could limit the AUD’s upside and lead to more volatile movements.

The fundamental reasons for the AUD’s decline are clear, but this also means that if these factors change, the AUD could rebound. Although FX markets are volatile and difficult to predict precisely, the AUD’s high liquidity, strong cyclical patterns, and its economic structure make medium- to long-term trend analysis relatively straightforward.

Investing in the AUD requires balancing short-term trading opportunities with long-term risk management—capturing rebounds while guarding against structural declines. Currently, investors should closely monitor RBA policy signals, Chinese economic data, and US dollar trends to adjust their positions accordingly.