Will the Australian dollar continue to soar in 2026? The battle between central bank policy divergence and black swan risks

The AUD/USD performance in 2025 showed surprising resilience, with a total increase of 7% supported by a weakening dollar, tariff policy adjustments, and domestic economic resilience. This rally has opened up imagination for 2026. However, as the new year begins, the road ahead for the Australian dollar is not smooth sailing.

Diverging Central Bank Policies, Australia Could Be the “Hawkish Winner”

The policy direction of the Reserve Bank of Australia (RBA) has become the first key factor influencing the AUD’s trend in 2026. As domestic inflation pressures re-emerge, market opinions are divided on whether the RBA will remain on hold or reverse course to hike rates.

Westpac maintains a cautious stance, expecting the RBA to keep policy rates unchanged throughout the year. However, the Commonwealth Bank of Australia anticipates at least one rate hike. The more hawkish institutions are National Australia Bank and Citigroup, both predicting the RBA will implement two rate hikes in 2026, scheduled for February and May respectively.

In contrast, the Federal Reserve’s policy trajectory appears more moderate. The mainstream market expects the Fed to have room for two rate cuts in 2026, though JPMorgan offers a more conservative forecast of just one cut. This divergence in central bank policies—potentially maintaining or tightening by the RBA versus continued easing by the Fed—creates a widening interest rate differential favorable to the AUD.

Economic Fundamentals and China Factors as Constraints

Australia’s economy demonstrated unexpected resilience in 2025. Despite external shocks, GDP growth remained solid, and the unemployment rate stayed largely stable within manageable levels. The Organisation for Economic Co-operation and Development (OECD) expects that driven by a gradual recovery in household disposable income, Australia’s GDP will grow at 2.3% in 2026, an improvement over 2025.

However, a key concern is Australia’s heavy reliance on commodity exports, with China as its largest trading partner. China’s economic health directly impacts Australian demand. If China’s growth slows more than expected in 2026, Australian exports could face pressure, potentially becoming a downside risk for the AUD exchange rate. Notably, policy adjustments following Australia’s 2025 federal election may also reshape domestic economic expectations and influence the central bank’s policy space.

“Black Swan” Threats to Risk Asset Pricing

As a typical risk currency, the AUD’s movements are inversely related to global risk sentiment. When risk appetite rises, the AUD benefits; when risk aversion increases, the AUD is prone to sell-offs.

The geopolitical environment in 2026 contains multiple uncertainties. If U.S. trade policies escalate again, triggering a new round of tariff wars, or if conflicts in the Middle East intensify, global risk appetite could decline sharply, dampening the upward momentum of USD/AUD.

Can Institutional Forecasts Come True?

Major institutions have provided relatively optimistic but divergent forecasts for the AUD in 2026.

JPMorgan believes that Australia’s strong economic growth combined with the RBA’s prudent stance will support the AUD. They expect USD/AUD to reach 0.67 in Q1 and close the year at 0.68.

Deutsche Bank is more optimistic, highlighting the interest rate differential advantage of the AUD among the world’s top ten reserve currencies. The bank forecasts USD/AUD to hit 0.69 in Q2 and rise to 0.71 by year-end.

National Australia Bank’s forecast is more aggressive—expecting 0.71 in Q2 and possibly reaching 0.72 in Q3.

All these forecasts point in one direction: the AUD is expected to continue rising in 2026. However, this outlook depends on several assumptions: that geopolitical black swan events do not escalate significantly, that China’s economy does not experience a hard landing, and that the Fed does not delay rate cuts excessively. In other words, the Australian dollar’s bull market remains built on multiple assumptions, and investors should prepare for various risks.