Why has the AUD/USD remained under long-term pressure? An in-depth analysis of the reasons for the Australian dollar's decline and the limitations on its rebound

The Australian dollar is the fifth most traded currency globally, and the AUD/USD currency pair is also among the most actively traded in the world. Its high liquidity and low spreads allow traders to operate more flexibly. However, despite being considered a high-yield currency in the past, the AUD has shown persistent weakness over the last decade. To understand the reasons behind the AUD’s decline, a deep analysis from macroeconomic, interest rate differential, and commodity price perspectives is necessary.

Reasons for AUD Decline: A Structural Decline Over Ten Years

The weakness of the AUD is not a short-term phenomenon. From the 1.05 level in early 2013 to now, the AUD/USD has depreciated by over 35% in ten years, while the US dollar index (DXY) appreciated by 28.35%. This reflects a global “strong dollar cycle.”

The main reasons for the AUD’s decline include three aspects:

First, weak global commodity demand. Australia’s export structure is highly dependent on raw materials such as iron ore, coal, and energy. When China’s economic recovery is insufficiently strong, these commodity prices come under pressure, and the commodity currency nature of the AUD becomes a drag. During 2023-2024, China’s recovery remains weak, and commodity prices fluctuate at high levels, leading to a prolonged period of AUD weakness.

Second, the disappearance of interest rate advantage. The interest rate gap between the Reserve Bank of Australia (RBA) and the US Federal Reserve (Fed) has been narrowing. As Australia’s interest rate advantage diminishes, capital flows relying on interest rate differentials tend to withdraw, directly impacting the attractiveness of the AUD as a high-yield currency.

Third, the structural US dollar advantage. During a strong dollar cycle, the US dollar’s position as a global safe-haven asset and settlement currency remains unshakable. The US economy’s size, deep capital markets, and political stability ensure that even if interest rates fall, the dollar retains a relatively strong foundation. This makes it difficult for the AUD to sustain a rebound at high levels.

Extended Reasons for AUD Decline: External Shocks Intensify

In addition to structural factors, recent reasons for the AUD’s decline include external shocks. Uncertainty in US tariff policies directly affects global trade flows, putting pressure on export prospects of commodity-exporting countries, including Australia. Meanwhile, domestic economic growth in Australia remains weak, and asset attractiveness is relatively low, further weakening the AUD’s support.

Whenever the AUD approaches previous high zones, market selling pressure becomes evident, indicating limited confidence in the currency. This “rebound with no trend” characteristic is typical of the AUD’s decline—rebounds are often just technical corrections rather than sustained moves driven by fundamentals.

Three Key Factors to Understand AUD Trends

While understanding the reasons for the AUD’s decline, investors also need to grasp the core variables that determine its future trend. The medium- to long-term movement of the AUD is influenced by three main factors:

1. RBA monetary policy and interest rate structure

The Reserve Bank of Australia’s policy stance is a crucial support for the AUD. Currently, the RBA’s cash rate is about 3.60%, with market expectations of another rate hike in 2026. If inflation remains sticky and the labor market stays resilient, a hawkish RBA stance will help rebuild the AUD’s interest rate advantage; conversely, if rate hike expectations fade, the AUD’s support will weaken significantly.

2. Chinese economy and commodity price fluctuations

As a commodity currency, the AUD essentially reflects Chinese demand. When China’s infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen simultaneously, and the AUD usually reacts quickly. However, if China’s recovery remains weak, even short-term rebounds in commodities often lead to a “rise and fall” pattern in the AUD. This explains why the decline in the AUD is often highly correlated with Chinese economic data.

3. US dollar trend and global risk sentiment

The Fed’s policy cycle remains the core driver of the global forex market. In a rate-cut environment, a weakening dollar generally benefits risk currencies, and the AUD benefits accordingly; but if risk aversion rises and capital flows back into the dollar, the AUD can weaken even if fundamentals are stable. When energy prices are weak and global demand is pessimistic, investors tend to seek safe-haven assets rather than cyclical currencies like the AUD, limiting its upside potential.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the dollar. If only one of these is present, the AUD is more likely to remain in a range rather than trend upward.

Future AUD Outlook and Market Divergence

The key to the AUD’s future trend lies in whether the rebound can turn into a trend. Major institutions’ views are notably divided, reflecting the complexity of the AUD’s outlook.

Morgan Stanley expects the AUD/USD to rise to 0.72 by the end of 2025, mainly supported by the RBA’s potential hawkish stance and strengthening commodity prices.

Traders Union’s statistical model shows an average of about 0.6875 (range 0.6738-0.7012) by the end of 2026, rising further to 0.725 by the end of 2027, emphasizing strong Australian labor markets and a recovery in commodity demand.

UBS’s view is more conservative, believing that despite resilience in Australia’s economy, global trade uncertainties and potential Fed policy shifts could limit the AUD’s gains, with the exchange rate around 0.68 by year-end.

CBA economists recently offered a more cautious outlook, suggesting that the AUD’s rebound might be temporary. They forecast the AUD/USD to peak around March 2026 but possibly decline again by the end of 2026.

In actual trend terms, the AUD appreciated about 5-7% in 2025, reaching as high as 0.6636. However, on a longer-term scale, the AUD remains relatively weak. Looking ahead to the first half of 2026, the AUD is likely to fluctuate between 0.68 and 0.70, influenced by Chinese data and US non-farm payrolls. Short-term pressure mainly stems from Chinese economic data, while long-term positives include Australia’s resource exports and commodity cycle recovery.

Basic Mechanisms of Trading AUD

The AUD/USD is one of the top five most traded forex pairs in the world. Although currency exchange rates are inherently unpredictable, the characteristics of the Australian dollar—high liquidity and clear volatility patterns—make analyzing its trend relatively straightforward.

Investors can participate in AUD movements through forex margin trading. This trading mode supports both long and short positions, with leverage ratios from 1-200, allowing investors to seek profits not only in bullish markets but also in bearish ones. The low entry barrier makes it suitable for small and medium investors.

It’s important to emphasize that all investments carry risks. Forex trading is a high-risk activity, and investors may lose all their capital. Before engaging in any trading, one should fully understand the risks and assess their own risk tolerance.

Investment Insights on AUD

As a “commodity currency,” the AUD’s attributes remain prominent, especially its high correlation with prices of copper, iron ore, coal, and other raw materials. The essence of understanding the AUD’s decline is to understand the mutual constraints between commodity cycles and the US dollar cycle.

From market analysis, in the short term, the support comes from the RBA’s hawkish stance and strong commodity prices. However, in the medium to long term, attention should be paid to global economic uncertainties and potential rebounds in the dollar, which could limit the AUD’s upside and lead to more volatile movements.

Although forex market fluctuations are rapid and predicting exchange rates is inherently difficult, the AUD’s high liquidity, strong volatility patterns, and economic structure make medium- to long-term trend judgments relatively easier. By focusing on the RBA policy, Chinese economic data, and the US dollar index, investors can better grasp the pulse of AUD movements.