## Why Is the Australian Dollar Still Struggling? Is the Exchange Rate Outlook Truly Optimistic?

As one of the top five most traded currencies globally, the AUD boasts high liquidity and low spreads, making it a popular trading target among investors. However, looking at the past decade, the AUD's performance has been quite poor—starting near 1.05 in early 2013 and depreciating over 35% by 2023, while the US dollar index surged by 28.35%. During the same period, other currencies like the euro, yen, and Canadian dollar also weakened. This is not just an AUD issue but a reflection of a broad **strong dollar cycle** suppressing emerging market and commodity currencies.

## Why Can't the AUD Rise? Three Structural Challenges

On the surface, the AUD surged 38% during the COVID-19 pandemic in 2020, and in 2025, it rose 5-7% due to commodity rebounds, even breaking above 0.66 at times. Yet, every time it approaches high levels, selling pressure emerges, and market confidence in the AUD remains limited.

**The simple reason — the AUD lacks sustained upward momentum:**

1. **Commodity Demand and Export Pressure**: Australia's export structure heavily depends on bulk commodities like iron ore, coal, and energy. US tariffs have hampered global trade, leading to a decline in raw material exports, directly undermining the AUD's status as a commodity currency.

2. **Diminishing Interest Rate Advantage**: The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%. While markets expect a potential hike to 3.85% in 2026, the narrowing interest rate differential with the US has become a trend, making it difficult to reverse. Many investors previously viewed the AUD as a high-yield currency for carry trades, but its attractiveness has waned.

3. **Weak Domestic Economy**: Australia's domestic growth remains sluggish, and asset attractiveness is relatively low, providing little intrinsic support for the AUD.

## Can the AUD Truly Reversal Its Downtrend? The Key Factors

Investors seeking to identify a turning point for the AUD need to monitor three core variables:

### 1. RBA Monetary Policy: Will the interest rate differential be rebuilt?

Expectations of RBA rate hikes provide short-term support. If inflation remains sticky and the labor market stays resilient, the RBA's hawkish stance will favor rebuilding the interest rate advantage, supporting the AUD. Conversely, if rate hikes fall short, the AUD's support will weaken significantly.

### 2. China’s Economy and Commodity Trends: The External Driver for the AUD

As a commodity-exporting country, China's demand is the most critical variable. When China's infrastructure and manufacturing activity pick up, iron ore prices tend to strengthen, and the AUD often reacts quickly. However, if China's recovery lacks momentum, even short-term commodity rebounds may be followed by declines in the AUD.

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

The Federal Reserve's policy cycle remains central to global FX markets. A dovish environment tends to weaken the dollar, benefiting risk currencies like the AUD; however, if risk aversion rises and capital flows back into the dollar, the AUD may weaken even if its fundamentals haven't deteriorated. Recent energy prices and global demand remain weak, leading markets to favor safe-haven assets over cyclical currencies like the AUD.

**In summary**, for the AUD to enter a sustained medium- to long-term bullish phase, three conditions must align: a hawkish RBA, genuine improvement in Chinese demand, and a structural weakening of the dollar. If only one or two are present, the AUD is more likely to fluctuate within a range rather than trend upward unilaterally.

## What Do Major Institutions Say About the AUD Outlook?

Regarding the AUD's future, opinions vary, reflecting market uncertainty:

- **Morgan Stanley** projects the AUD/USD could rise to 0.72 by the end of 2025, supported by the RBA's hawkish stance and commodity prices.

- **Traders Union's model** estimates an average of about 0.6875 by the end of 2026 (range 0.6738–0.7012), rising further to 0.725 in 2027, driven by a strong labor market and commodity demand recovery.

- **UBS** remains more conservative, citing global trade uncertainties and Fed policy shifts as potential limits to AUD gains, expecting the exchange rate to stay around 0.68 by year-end.

- **Commonwealth Bank of Australia (CBA)** recently warned that the AUD's rebound might be short-lived. They forecast the AUD/USD to peak around March 2026 but possibly retreat by year's end.

- **Some Wall Street analysts** caution that if the US avoids recession but the dollar remains strong due to interest rate differentials, the AUD may struggle to break through 0.67.

**Personal view**: In the first half of 2026, the AUD is likely to oscillate between 0.68 and 0.70, influenced by Chinese data and US non-farm payrolls. The AUD won't crash (given solid fundamentals and a relatively hawkish RBA), but it also won't surge to 1.0 (as the dollar's structural advantage persists). Short-term pressures mainly stem from Chinese data, while long-term positives include resource exports and commodity cycles.

## The Underlying Logic of Investing in the AUD

The AUD/USD is among the top five most traded forex pairs worldwide, characterized by high liquidity and predictable volatility, making medium- to long-term trend analysis relatively straightforward. Although currency exchange rates are inherently difficult to predict precisely, the AUD's clear economic structure—being heavily reliant on commodity exports—makes fundamental analysis particularly valuable.

Investors interested in participating in AUD fluctuations can do so via forex trading. The forex market offers two-way trading, relatively low barriers to entry, and is suitable for small to medium investors. However, it’s crucial to remember: **all investments carry risks, and forex trading is high-risk; investors may lose all their capital.**

## Summary of the AUD Outlook

As a commodity currency, the AUD is highly correlated with prices of iron ore, copper, coal, and other raw materials, which is its fundamental characteristic. In the short term, a hawkish RBA stance and strong commodity prices will provide support. However, in the medium to long term, global economic uncertainties and potential dollar rebounds will limit upside and may lead to increased volatility.

Overall, while the AUD is highly liquid and actively traded, breaking free from its long-term weakness requires multiple conditions to align. Investors should avoid excessive optimism and instead plan positions with the expectation of limited rebounds.