Can the Australian dollar continue its strength? Three variables to watch in 2026

In 2025, the AUD/USD( performance has been impressive, with an approximate 7% increase over the year driven by a weaker US dollar, tariff expectations, and resilient domestic economy. As we enter 2026, whether this upward momentum can continue depends on the outcome of three key factors.

Diverging Central Bank Policies Are Taking Shape

Australia’s inflationary pressures have picked up, and the market generally believes that the era of rate cuts by the Reserve Bank of Australia (RBA) has ended. Regarding whether there will be a shift to rate hikes in 2026, opinions among major institutions vary:

Westpac is relatively cautious, expecting the RBA to remain on hold; Commonwealth Bank of Australia forecasts one rate hike; National Australia Bank and Citibank are more hawkish, predicting two hikes (one in February and one in May).

Meanwhile, the Federal Reserve is widely expected to have room for two more interest rate cuts in 2026, but JPMorgan’s view is more conservative, expecting only one cut. This policy divergence is very favorable for the Australian dollar— the RBA’s tightening stance contrasted with the Fed’s relative easing should theoretically push up the AUD/USD.

Economic Fundamentals Have Support and Worries

On the domestic front, Australia’s economy remains resilient. In 2025, GDP growth exceeded expectations, and the unemployment rate stayed stable. The Organisation for Economic Co-operation and Development (OECD) expects Australian GDP to grow to 2.3% in 2026, mainly driven by a rebound in household disposable income.

However, there is a significant hidden risk: Australia’s economy heavily depends on commodity exports, with China being its largest trading partner. If China’s economic growth slows more than expected, Australian exports could be pressured, which would, in turn, drag down the AUD’s performance.

Black Swan Risks Cannot Be Ignored

The AUD is a typical “risk currency.” It benefits when global risk appetite rises but can be easily knocked down during risk aversion. If in 2026 U.S. President Trump escalates trade disputes again or geopolitical tensions in the Middle East worsen, risk appetite could decline sharply, and the AUD/USD might face downward pressure.

What Do Institutions Say About 2026?

Overall, mainstream institutions are optimistic about the Australian dollar. JPMorgan expects AUD/USD to reach 0.67 in the first quarter and end the year at 0.68; Deutsche Bank is more bullish, estimating 0.69 in Q2 and 0.71 at year-end; National Australia Bank is the most optimistic, expecting it to rise to 0.71 in Q2 and further up to 0.72 in Q3.

The common logic behind these forecasts is that Australia’s economic growth remains steady, and the RBA’s policy stance is tighter than the Fed’s, providing sufficient support for the Australian dollar. However, traders should closely monitor changes in China’s economy and global geopolitical developments—these two variables could become black swan events that disrupt the rhythm.