AUD exchange rate faces a critical test after rebounding in 2025; future trend determined by three key factors

The Australian dollar, as the fifth most traded currency globally, ranks alongside the US dollar, euro, Japanese yen, and British pound, with its exchange rate fluctuations influencing global capital flows. Although the AUD appears to be strong, a deeper analysis reveals that this rebound is more of a “technical correction” rather than a “trend reversal.”

Ten Years of Decline in the AUD, Can the 2025 Rebound Rewrite the Pattern?

Over the past decade, the performance of the AUD against the USD has been disappointing. Starting from a level of 1.05 in early 2013, by the end of 2023, the Australian dollar had depreciated by over 35%, while the US dollar index (DXY) increased by 28.35% during the same period. This is not an issue unique to the AUD—major currencies like the euro, yen, and Canadian dollar also depreciated simultaneously, reflecting a global shift into a long-term “Strong Dollar Cycle.”

The turning point occurred in 2025. Benefiting from a sharp rise in iron ore and gold prices, along with the Federal Reserve’s rate cuts driving risk asset inflows, the AUD/USD briefly rose to 0.6636, appreciating approximately 5-7%. However, whether this rebound can turn into a sustained trend remains a market concern.

Analysts point out that whenever the AUD approaches previous highs, selling pressure becomes evident, indicating market confidence in the AUD remains limited. The main reasons include: US tariff policies impacting global trade, declining raw material exports weakening the commodity currency status of the AUD, the difficulty in reversing the US-Australia interest rate differential, and sluggish domestic economic growth in Australia reducing asset attractiveness.

Three Key Factors Determining the AUD’s Future Direction

The future of the AUD depends on the interaction of three core variables. To rebuild a medium- to long-term bullish trend, all three conditions must be met.

First, whether the RBA can restore interest rate differentials

The AUD has long been regarded as a high-yield currency, with its attractiveness directly linked to the interest rate differential structure. Currently, the Reserve Bank of Australia (RBA) cash rate is about 3.60%, with market expectations of another rate hike in 2026. The Commonwealth Bank of Australia forecasts a peak rate of up to 3.85%.

If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA will help the AUD regain its interest rate advantage; conversely, if rate hike expectations fall short, the AUD’s support will weaken significantly. This is the most immediate catalyst in the short term.

Second, the outlook for China’s economy and commodity prices

Australia’s export structure is highly concentrated in iron ore, coal, and energy, making the AUD essentially a typical commodity currency, with China’s demand being the most critical variable. When China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen in tandem, and the AUD usually reflects this quickly in the exchange rate; but if China’s recovery is insufficient, even a short-term commodity rebound can lead to a quick correction in the AUD.

2025 has validated this pattern—rising iron ore prices directly pushed the AUD higher. The key question is whether this momentum can be sustained.

Third, the US dollar trend and global risk sentiment

From a capital flow perspective, the Federal Reserve’s policy cycle remains central to the global FX market. In a rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD; but if risk aversion increases and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are stable. Currently, market sentiment has slightly improved, but energy prices and global demand remain weak, limiting the AUD’s upside potential.

Diverging Forecasts for the AUD Exchange Rate: Different Views from Institutions

Mainstream institutions show clear divergence on the AUD’s future:

Morgan Stanley is the most optimistic, projecting the AUD/USD could rise to 0.72 by the end of 2025. This outlook is based on the possibility that the RBA maintains a hawkish stance and on the support from rising commodity prices.

Traders Union’s statistical model indicates an average of about 0.6875 by the end of 2026 (range 0.6738 to 0.7012), rising further to 0.725 by the end of 2027, emphasizing Australia’s strong labor market and commodity demand recovery.

UBS adopts a more conservative stance, believing that despite Australia’s economic resilience, global trade uncertainties and Fed policy changes could limit the AUD’s gains, with the exchange rate expected to stay around 0.68 by year-end.

CBA Economists recently warned that the AUD’s rebound might be short-lived, predicting a peak around March 2026, with a possible decline again by year-end.

Some Wall Street analysts caution that if the US avoids recession but the dollar remains super-strong, the AUD will struggle to break through the 0.67 resistance.

Realistic Expectations for the AUD

Synthesizing various viewpoints, the AUD is likely to fluctuate between 0.68 and 0.70 in the first half of 2026, influenced by Chinese data and US non-farm payrolls. In the short term, the AUD is unlikely to fall sharply because Australia’s fundamentals remain relatively solid, and the RBA maintains a hawkish stance; but it probably won’t surge to previous highs either, as structural US dollar advantages persist.

Short-term pressures mainly stem from Chinese economic data, while long-term positives include resource exports and the commodity cycle recovery. The core question for the AUD’s trajectory is “whether the rebound can turn into a trend.” Most analysts agree that while there is room for short-term correction, returning to a genuine bullish trend requires clearer macroeconomic conditions.

Advantages of Trading the AUD

The AUD/USD is one of the top five most traded forex pairs worldwide. Its movement is influenced by complex factors, but given the distinct characteristics and high liquidity of the Australian currency, analyzing its exchange rate is relatively straightforward. While short-term models have limited accuracy, the AUD’s strong volatility patterns and clear economic structure make medium- to long-term trend analysis more feasible.

For investors, the AUD offers opportunities with both risks and rewards. In an era of increasing global economic uncertainty, understanding AUD movements is akin to grasping the pulse of commodity cycles and interest rate differentials.

Summary of Investing in the AUD

As a commodity currency of a major resource-exporting country, the AUD is highly correlated with iron ore, coal, and other raw material prices. In the short term, hawkish RBA policies and strong raw material prices will provide support; but in the medium to long term, global economic uncertainties and potential US dollar rebounds could limit gains and cause volatility.

The investment logic for the AUD is clear: monitor RBA policies, Chinese economic data, and US dollar trends, as their interaction determines the AUD’s direction. The outlook for 2026 remains uncertain, but the fundamentals are relatively stable, with volatility and regularity making it an important window into global economic cycles.