Australian Dollar at the Crossroads: Why Is Volatility Increasing and How to Assess the Investment Outlook

As the fifth-largest traded currency globally, the Australian dollar (AUD) attracts a large number of short-term and medium-to-long-term investors due to its high liquidity and low spreads. However, if you examine the recent trends of the AUD over the past few years, you’ll notice that this once high-yielding asset is undergoing a deep adjustment.

The Transformation of the AUD: From High-Yield Darling to Weak Commodity Currency

The AUD is a typical commodity currency. Since the Australian economy heavily relies on exports of iron ore, coal, copper, and other raw materials, any fluctuations in international commodity prices directly impact the AUD’s performance. This also explains why the AUD was once a favorite for carry trades—its attractive interest rate differentials and strong commodity demand often pushed its value higher.

However, data from the past decade tell a very different story. Starting from a high of 1.05 in early 2013, the AUD/USD has depreciated by over 35%, while the US dollar index (DXY) has risen by 28.35% during the same period. Compared to major currencies like the euro, yen, and Canadian dollar, which also weakened against the dollar, this reflects a broad-based strong dollar cycle that has overwhelmed all the AUD’s advantages.

In Q4 2024, the AUD’s downward trend became even more apparent. The full-year decline reached 9.2%, and after entering 2025, it even briefly touched 0.5933, hitting a five-year low. Analysts generally point out that US tariffs suppress global trade, raw material exports have declined, and the Australian interest rate differential is difficult to reverse—all factors contributing to capital outflows from Australia and a significant drop in the attractiveness of AUD assets.

The Rebound Window in 2025: A Battle of Three Forces

By mid-2025, signs of a rebound in the AUD have emerged that warrant attention. In September, driven by soaring iron ore and gold prices and rising expectations of Fed rate cuts, the AUD/USD briefly rose to 0.6636, reaching a high since November 2024. This rally indicates that the AUD has not completely lost its appeal—if conditions change, a rebound window still exists.

However, whether this rebound can continue depends on three key variables:

Australia’s Inflation and Central Bank Stance

In Q3 2025, Australia’s Consumer Price Index (CPI) rose by 1.3% month-over-month, surpassing the previous quarter’s 0.7% and exceeding market expectations. As a result, the Reserve Bank of Australia (RBA) adopted a cautious stance, repeatedly emphasizing that core inflation pressures are unlikely to decline as quickly as expected. They stressed the need to confirm that inflation has entered a sustainable downward trajectory before easing policy further. This cautious approach in the short term actually supports the AUD—relative to countries aggressively cutting rates, Australia’s hawkish stance provides some support.

The Resilience of the US Dollar

Although the Fed has cut rates twice this year, Chair Powell’s signals have not been as dovish as the market anticipated. The US dollar index (DXY) showed unexpected resilience after bottoming out this summer, rebounding about 3%, with a growing likelihood of breaking the 100 psychological level. Historically, a strengthening dollar often coincides with a weakening AUD, indicating an inverse relationship.

The Recovery of the Chinese Economy

Australia’s economic structure is highly dependent on resource exports, with China being its largest trading partner. The strength or weakness of China’s economy directly influences demand for key raw materials like iron ore, coal, and natural gas, which in turn is a core driver of AUD movements. When China’s economy shows signs of recovery, resource demand and prices increase, providing strong support for the AUD; conversely, if China’s property market remains sluggish and growth slows, the AUD loses its most fundamental support.

Diverging Views Among Institutions on AUD Outlook

Faced with numerous uncertainties, major Wall Street institutions have divergent forecasts.

Morgan Stanley is relatively optimistic, expecting the AUD/USD to rise to 0.72 by the end of 2025, citing Australia’s hawkish stance and sustained commodity price strength.

UBS is more cautious, believing that although the Australian economy remains resilient, global trade uncertainties and changes in Fed policy will limit the upside potential, with a year-end target around 0.68.

The economists at the Commonwealth Bank of Australia offer the most conservative outlook: they believe the AUD’s rebound may be short-lived. They project the AUD/USD to peak around March 2026 and then decline again, reasoning that despite a potentially weaker dollar in 2025, the US economy’s growth rate surpassing other major economies will eventually lead to a resumption of dollar strength.

Key Exchange Rate Trends and Analysis

AUD/USD

The RBA maintained interest rates at 3.6% in November, signaling caution. Currently, the AUD/USD hovers around 0.65, with key resistance at 0.6450 and support at 0.6373.

In the short term, if US economic data underperform (suggesting the Fed will accelerate rate cuts), the AUD could break above 0.6450 and test the 0.6500 psychological level. Conversely, if US data remains strong, the AUD might fall below 0.6373 and test around 0.6300. Over the next 1-3 months, expect the AUD/USD to fluctuate within the 0.63–0.66 range.

AUD/CNY

Trade relations between China and Australia are crucial for this currency pair. If trade policies stabilize and favor the AUD, it could appreciate against the yuan. The yuan’s movement is heavily influenced by Chinese central bank policies and US-China relations. Recently, the yuan’s relative stability has limited further AUD gains. Over the next 1-3 months, expect AUD/CNY to range between 4.6 and 4.75; if China’s economy weakens further, the AUD might short-term rise toward 4.8.

AUD/MYR

Malaysia also relies on resource exports, making the MYR sensitive to commodity prices. Australian economic weakness could limit AUD rebounds, while if Malaysia’s central bank tightens policy, the MYR’s relative strength could suppress the AUD. Expect AUD/MYR to fluctuate between 3.0 and 3.15; if Australian data weakens further, it could test near 3.0.

Investor Strategies

Short-term Trading (1-3 days)

Adopt range trading strategies. 0.6450 is a key resistance; a breakout could be a long entry targeting 0.6464 (200-day moving average) and the 0.6500 psychological level. If the price falls below 0.6373, consider short positions targeting 0.6336 or 0.6300. Reduce positions before major economic data releases to avoid excessive volatility.

Medium-term Holding (1-3 weeks)

Bullish scenarios require two conditions: increased expectations of Fed rate cuts (weak employment data, falling inflation) and easing of trade tensions. Under these conditions, AUD could break above the 200-day moving average (0.6464) and test 0.6550–0.6600. Bearish scenarios involve stronger-than-expected US growth, dollar rebound, and weak Australian trade data.

Long-term Positioning

If bullish on the AUD’s long-term prospects, consider accumulating in current lows through phased entries, leveraging time to smooth short-term volatility. This strategy assumes a confirmed medium-term uptrend.

Key Indicators and Summary

Monitoring key indicators such as Australian CPI and GDP data, China’s economic growth, commodity prices (especially iron ore and gold), signals of Fed policy shifts, and the strength of the US dollar index is essential.

Currently, the AUD/USD is in a phase of technical consolidation and fundamental tug-of-war, mainly trading within a range (0.6370–0.6450). Breakouts should be followed with trend confirmation. The medium- to long-term direction depends on Fed policy signals and global trade risk developments. If data this week reinforce rate cut expectations, consider long positions; if not, beware of dollar rebound risks. Traders should closely watch market sentiment shifts following data releases and adjust strategies accordingly to manage high risks.