Will the AUD 2026 continue to take off? Central bank policy divergence vs black swan risks

The AUD/USD performance in 2025 was quite strong, supported by tariff waves, a weakening dollar, and Australia's economic resilience, with a total increase of 7% for the year. As we enter 2026, what does the outlook for the Australian dollar look like? The key depends on three major variables: divergence in central bank policies, domestic economic performance, and those unpredictable geopolitical black swans.

**RBA hawkish vs Fed rate cuts, whose impact is greater?**

Rising inflation pressures in Australia have changed market expectations. It is generally believed that the RBA has ended its rate-cutting cycle, but opinions differ on whether it will raise rates in 2026:

- Westpac Bank believes the RBA will "stand pat"
- Commonwealth Bank of Australia expects one rate hike
- National Australia Bank and Citibank are betting on two hikes (in February and May respectively)

On the Fed side, the market generally expects two more rate cuts in 2026, but JPMorgan is more conservative, expecting only one cut.

Regardless of the final numbers, the logic behind policy divergence is clear: if the RBA remains hawkish or holds steady while the Fed continues to cut, the widening interest rate differential will directly support the AUD, leading to a depreciation of the USD against the AUD.

**Fundamentals: Australia resilience vs China drag**

In 2025, Australia's economy performed steadily, with GDP growth exceeding expectations and unemployment remaining low. OECD forecasts that Australia's GDP growth will rise to 2.3% in 2026, with a recovery in household disposable income serving as a key driver.

But there's an unavoidable risk: Australia's economy is highly dependent on commodity exports, with China being its largest trading partner. If China's economic growth slows unexpectedly, Australia's export demand and commodity prices will be hit, causing the AUD to decline. This is a Damocles sword hanging overhead.

**Geopolitical black swans: Trump trade war vs Middle East tensions**

As a typical "risk currency," the AUD fears a decline in global risk sentiment the most. In 2026, there are two major concerns:

First, Trump may initiate another trade war—tariff escalations would directly impact global trade expectations, risk assets would be sold off, and the AUD would be hit hardest. Second, if conflicts in the Middle East escalate further, risk aversion will spike rapidly, and the appeal of high-yield currencies like the AUD will instantly diminish.

Any one of these black swans exploding could cause the AUD/USD to face a significant correction.

**Institutional forecasts: Optimism vs Divergence**

Despite numerous risks, most institutions remain optimistic about the AUD:

- JPMorgan: AUD/USD target of 0.67 in Q1 2026, 0.68 by year-end
- Deutsche Bank: target of 0.69 in Q2, reaching 0.71 by year-end
- NAB: 0.71 in Q2, heading straight to 0.72 in Q3

From these forecasts, it’s clear that institutions generally see room for the AUD to rise in 2026, supported by steady RBA policies and widening interest rate differentials. However, the divergence in forecast numbers also reveals a fact: the outlook for the AUD in 2026 is not set in stone, with many intermediate variables.

**Bottom-line judgment**

The script for the AUD in 2026 looks like this: fundamentals are leaning bullish (policy divergence, stable economic growth), but black swan risks cannot be ignored. In the short term, the trend favors USD depreciation against the AUD, but if Trump’s trade war heats up or China’s economy slows significantly, the AUD could be knocked back. The risk-reward ratio still requires careful weighing.