The decade-long mystery of the Australian dollar's decline: the dilemma of commodity currencies and reversal opportunities

The Australian dollar was once the fifth-largest traded currency globally (after USD, EUR, JPY, GBP). As a major currency pair, AUD/USD is known for its high liquidity and tight spreads. However, over the past decade, this “high-yield currency favorite” has become a market outcast.

AUD/USD Ten-Year Trend: From 1.05 to 0.66 in a Long-Term Depreciation Dilemma

Starting from early 2013 at 1.05, the AUD/USD has depreciated over 35% in ten years, while the US Dollar Index (DXY) rose by 28.35%. This is not an isolated decline for the AUD but a victory for the global “strong dollar cycle”—the euro, yen, and Canadian dollar all weakened against the dollar, but the AUD’s fall was even deeper.

The only exception was during the 2020 pandemic. At that time, Australia’s stable pandemic control, strong demand for commodities like iron ore in Asia, and the Reserve Bank of Australia’s (RBA) policies drove the AUD to surge approximately 38% within a year. Since then, however, the AUD has mostly been consolidating or remaining weak.

Entering 2025, with rising iron ore and gold prices, and the Federal Reserve cutting rates to boost risk assets, the AUD/USD rose to 0.6636, appreciating about 5–7% for the year. But on a ten-year scale, this is merely a rebound and far from reversing the long-term downtrend.

Why Is the AUD So Fragile? The Root Causes of Triple Pressure

First: US Dollar Hegemony Remains

The interest rate differential between the US and Australia remains difficult to reverse. The RBA’s cash rate is about 3.60%, with market expectations to possibly rise to 3.85% in 2026. However, US rates remain high, and the interest advantage has diminished. When the rate differential is no longer a selling point for the AUD, investors lack incentives to hold it.

Second: Dual Blow to Commodity Demand

Australia’s export structure heavily depends on raw materials like iron ore, coal, and energy—making the AUD essentially a “commodity currency.” Weak economic recovery in China, its largest buyer, directly undermines the AUD’s support. Worse, US tariff policies impact global trade, leading to declines in raw material exports and further weakening Australia’s commodity currency status.

Third: Diminished Domestic Economic Attractiveness

Australia’s domestic economy is sluggish, and asset attractiveness is relatively low. This means that even with external capital inflows, sustained demand is hard to generate.

When capital approaches previous highs for the AUD, market selling pressure increases significantly, reflecting limited confidence in its long-term outlook. In short, the AUD has become a “rebound-only, trendless” currency.

Three Core Variables to Watch for AUD Movement

The future direction of the AUD is influenced by multiple factors. Understanding the interaction of these three variables is key to grasping the potential for bullish or bearish shifts:

1. RBA Interest Rate Policy: Rebuilding the Interest Differential

The RBA’s hawkish stance is crucial. If inflation persists and the labor market remains resilient, expectations of rate hikes will help restore the interest advantage, supporting the AUD. Conversely, if expectations falter, the AUD’s support will weaken significantly.

2. China’s Economy and Commodity Prices: External Drivers

When China’s infrastructure and manufacturing activity rebound, iron ore prices tend to strengthen, and the AUD often reflects this quickly. However, if China’s recovery remains weak, even short-term commodity rebounds may lead to a quick correction in the AUD.

3. US Dollar Trends and Global Risk Sentiment: Capital Flow Drivers

The Fed’s policy cycle remains central to global FX markets. A rate cut environment usually weakens the dollar, benefiting the AUD. But rising risk aversion tends to strengthen the dollar, even if the AUD’s fundamentals are stable, exerting downward pressure. Recent energy prices and global demand softness remain concerns, with investors favoring safe-haven assets over cyclical currencies.

For the AUD to break into a genuine medium- to long-term bull trend, all three conditions must align: RBA adopts a hawkish stance, China’s demand substantially improves, and the dollar enters a structural weakening phase. If only one condition is met, the AUD is more likely to remain in a range-bound oscillation.

Future Outlook for AUD/USD: Optimism vs. Caution

Market opinions on the AUD outlook vary. Morgan Stanley projects the AUD could reach 0.72 by the end of 2025, supported by hawkish RBA policies and commodity prices. Traders Union’s statistical models forecast an average of about 0.6875 by the end of 2026 (range 0.6738–0.7012), rising further to 0.725 by the end of 2027, emphasizing labor market strength and commodity demand.

Conversely, UBS holds a more conservative view, citing global trade uncertainties and Fed policy shifts as limiting factors for AUD gains, expecting the exchange rate to stay around 0.68 by year-end. CBA economists recently issued a cautious outlook, predicting the AUD will peak around March 2026 and then decline again.

If the US avoids recession but the dollar remains super-strong due to interest rate differentials, the AUD will struggle to break above 0.67. Based on personal observation, in 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. The AUD won’t crash sharply because Australia’s fundamentals are solid and the RBA remains relatively hawkish, but it will face short-term resistance to new highs (structural dollar strength persists). Short-term pressures stem from Chinese data, while long-term positives include resource exports and commodity cycles.

Investment Considerations for AUD: Risks and Opportunities

As one of the top five most traded currencies, AUD/USD features high liquidity and predictable volatility, making medium- to long-term trend analysis relatively straightforward. However, all investments carry risks—foreign exchange trading is high risk, and investors may lose all capital.

The AUD, as a commodity currency, is highly correlated with prices of copper, iron ore, coal, and other raw materials. Before investing, it’s essential to understand these characteristics thoroughly and consider global economic conditions, dollar trends, and Chinese demand to make comprehensive judgments.

Summary: Key Turning Points for the AUD

In the short term, the AUD has room for recovery, with a 5–7% appreciation already evident. But to return to a strong bull phase, clearer macro conditions are needed—sustained hawkish RBA policies, genuine improvement in China’s economy, and a structural weakening of the dollar.

While FX markets are volatile and difficult to predict precisely, the AUD’s high liquidity and distinct economic structure make medium- and long-term trend assessment more accessible. In the near term, support will come from the RBA’s hawkish stance and strong commodity prices; in the medium to long term, global economic uncertainties and potential dollar rebounds will limit upside, possibly leading to more choppy movements.

For investors in the AUD, the key is not to predict exact peaks but to understand these three core variables and adjust strategies flexibly as market conditions evolve.