Australian dollar investment dilemma: Why has the decade-long weakness been hard to change? Will there be a turning point in 2026?

The Australian dollar (AUD), as one of the top five most traded currencies globally, holds an undisputed position. The AUD/USD currency pair offers ample liquidity and tight spreads, attracting both short-term traders and long-term asset allocators worldwide. However, when looking at a longer time horizon, the overall performance of the AUD over the past decade has been disappointing—sliding from 1.05 in early 2013 to below that level now, a decline of over 35%, while the US Dollar Index has risen by 28.35% during the same period. The answer to this puzzle lies in the “commodity currency” nature of the AUD.

The Fundamental Reason for the Long-term Weakness of the AUD: Not Just a Strong US Dollar, but Australia Losing Two Major Pillars

The AUD is considered a high-yield currency due to the interest rate advantage maintained by the Reserve Bank of Australia (RBA) in the past. However, this advantage has been gradually eroding over the last five years. Currently, the RBA cash rate is about 3.60%, and the Federal Reserve’s rate remains high, significantly narrowing the interest rate differential. If future rate hike expectations for the RBA fall short, the AUD’s attractiveness will further diminish.

More critically, Australia’s export structure is heavily reliant on commodities such as iron ore, coal, and energy. China, as Australia’s largest trading partner, directly influences the AUD’s movement through its economic momentum. During the COVID-19 pandemic in 2020, China’s rapid recovery drove a surge in commodity demand, causing the AUD/USD to spike by approximately 38% within a year. But from 2023 onward, China’s sluggish recovery and slowing manufacturing investment have caused iron ore prices to fluctuate at high levels, leading the AUD into a prolonged consolidation phase.

Uncertainty in US trade policies further exacerbates the situation. Escalating global trade frictions and declining expectations for raw material exports have directly undermined the commodity currency attribute of the AUD. Additionally, domestic economic weakness in Australia and relatively lower asset attractiveness contrast sharply with the relatively strong US economy, making the AUD an “oscillating, trendless” currency.

The Brief Outlook for 2025 and the True Test in 2026

In 2025, the AUD experienced a rebound—iron ore and gold prices rose, and the Fed’s rate cuts attracted capital flows into risk assets, pushing the AUD/USD to a high of 0.6636, appreciating about 5-7% for the year. But can this rebound continue? The key depends on whether three conditions can be simultaneously met.

First is a shift in the RBA’s stance. Market expectations suggest the RBA may resume rate hikes in 2026, with the federal funds rate forecasted to peak around 3.85%. If inflation remains sticky and the labor market stays resilient, the RBA’s hawkish stance will rebuild the interest differential advantage, providing support for the AUD.

Second is a tangible improvement in China’s economy. An uptick in infrastructure and manufacturing activity will boost iron ore demand, which the AUD typically reflects quickly. However, if China’s recovery falls short of expectations, even a short-term commodity rebound will leave the AUD vulnerable to a “spike and retrace” pattern.

Third is a turning point in the US dollar cycle. In a Fed rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD; but if global risk aversion rises and capital flows back into the dollar, the AUD will struggle despite solid fundamentals. Energy prices and global demand remain uncertain, and investors tend to favor safe-haven assets over cyclical currencies, creating an invisible ceiling for the AUD’s gains.

Diverging Predictions from Major Institutions on the AUD’s Future

Market opinions on the AUD’s trajectory in 2026 are highly divided. Morgan Stanley believes the AUD/USD could rise to 0.72, supported by the RBA’s hawkish policies and a commodity bull market. Traders Union’s statistical model is more optimistic, projecting an average of about 0.6875 by the end of 2026 (range 0.6738-0.7012), emphasizing Australia’s strong labor market and commodity demand recovery.

Conversely, more conservative forecasts exist. UBS suggests that despite Australia’s resilience, global trade uncertainties and Fed policy shifts will limit the AUD’s upside, expecting the exchange rate to stay around 0.68 by year-end. Economists at the Commonwealth Bank of Australia are even more cautious, predicting the AUD may peak around March 2026 before declining. Some Wall Street analysts warn that if the US avoids recession but the dollar remains super-strong, the AUD will find it difficult to break through the 0.67 resistance.

In summary, in the first half of 2026, the AUD is likely to fluctuate within the 0.68-0.70 range, mainly influenced by China’s economic data and US non-farm payroll figures. Australia’s solid fundamentals and relatively hawkish RBA will provide a support base, but structural US dollar advantages still exist, making a sharp breakout unlikely.

Three Key Indicators for AUD Investment

To gauge the future direction of the AUD, investors should focus on:

The RBA’s monetary policy stance — Interest rate decisions directly impact the AUD’s interest rate differential. Expectations of rate hikes are bullish signals; expectations of rate cuts are bearish.

China’s economic data and commodity prices — As a commodity currency, the AUD is highly correlated with iron ore and coal prices. Infrastructure investment and PMI data are leading indicators.

The US Dollar Index and global risk appetite — The Fed’s policy cycle dominates global FX markets. Rate cuts tend to favor the AUD, while rate hikes favor the dollar. When risk aversion rises, capital tends to flow into the dollar rather than the AUD.

Opportunities and Risks in AUD Investment

For AUD investors, the current environment presents both opportunities and pitfalls. The AUD’s high liquidity and volatility make it suitable for participation via forex margin trading. Investors can leverage 1-200x for long and short positions, seeking profit in both bull and bear markets, with relatively accessible trading thresholds.

However, it must be emphasized that forex trading is high-risk, and investors may lose all their capital. Exchange rate fluctuations are rapid and difficult to predict. It is recommended that investors first familiarize themselves with trading mechanisms through demo accounts and only commit real funds after establishing a clear trading logic.

For the AUD to enter a genuine medium- to long-term bullish trend, three conditions must be met simultaneously: hawkish RBA policies, substantial improvement in Chinese demand, and a structural weakening of the US dollar. Possessing only one of these makes the AUD more likely to remain range-bound. Therefore, success in AUD investment hinges on keenly capturing macroeconomic changes and implementing strict risk management.