Why has the Australian dollar depreciated by 35% over ten years? Can a rebound in 2026 become a reality?

The Australian dollar (AUD), as the fifth most traded currency pair globally (AUD/USD), has long been a favorite for hot money and carry trade strategies. However, looking back over the past decade, this once high-yielding currency has performed disappointingly—dropping from 1.05 in early 2013 to depreciate over 35% today. During the same period, the US dollar index surged by 28.35%, while the euro, yen, and Canadian dollar also depreciated against the dollar, indicating that Australia’s currency challenges are not solely isolated issues but part of a broader structural pressure from the global “strong dollar cycle.”

The Aussie Dilemma: Commodity Dependence + Diminishing Interest Rate Differentials + Economic Weakness

Australia’s export structure is highly reliant on commodities, with iron ore, coal, and energy making up the bulk, effectively making the AUD a “commodity currency.” However, over the past ten years, China’s manufacturing momentum has slowed, and demand for raw materials has decelerated, directly undermining the AUD’s support.

Even worse, the interest rate advantage between Australia and the US has gradually diminished. The once attractive “high-yield currency” halo has faded after the Federal Reserve’s aggressive rate hikes. By 2023-2024, narrowing interest rate differentials combined with weak Chinese recovery have led to a prolonged bearish trend for the AUD.

Analysts point out that US tariff policies impact global trade, further reducing raw material exports. Meanwhile, Australia’s domestic economy lacks new growth drivers, leading to a relative decline in asset attractiveness. Simply put, the AUD now resembles a “rebound but lacking a clear trend” currency—each time it approaches previous highs, selling pressure intensifies, reflecting a lack of market confidence.

The 2025 “Mini-Bull Run”: AUD Gains 5-7%, But Can It Continue?

In the first half of 2025, the AUD indeed showed impressive performance. Iron ore and gold prices surged, and the Federal Reserve’s rate cuts drove capital into risk assets, pushing the AUD/USD to a high of 0.6636, appreciating about 5-7% for the year. This was seen by the market as a sign of a rebound for the AUD.

But on a longer time scale, can this rebound turn into a sustained uptrend? The answer depends on three key factors.

Three Pillars Determining the Medium- to Long-Term Direction of the AUD

First: RBA Monetary Policy—Can the Interest Rate Differential Re-establish?

The Reserve Bank of Australia (RBA) currently has a cash rate of about 3.60%, with market expectations of possibly raising it again to 3.85% in 2026. If inflation remains sticky and the employment market stays resilient, a hawkish stance from the RBA could help the AUD rebuild its interest rate advantage. Conversely, if rate hike expectations falter, the AUD’s support will weaken significantly.

Second: China’s Economy and Commodity Prices—The “External Engine” for AUD

China’s infrastructure and manufacturing activity directly determine demand for commodities. When China’s demand is strong, iron ore prices tend to rise in tandem, and the AUD quickly reflects this in the exchange rate; however, if China’s recovery remains tepid, even short-term rebounds in commodities may lead to quick reversals in the AUD.

Third: US Dollar Trends and Global Risk Sentiment

The Federal Reserve’s policy cycle remains central to the global FX market. A rate-cut environment usually weakens the dollar, which benefits the AUD. But if risk aversion increases and capital flows back into the dollar, the AUD can come under pressure even if its fundamentals are stable. Recent energy prices and global demand remain cautious, with investors favoring safe-haven assets over cyclical currencies.

2026 and Beyond: Diverging Predictions from Major Institutions

Market opinions on the AUD’s future vary:

Optimists (Morgan Stanley) expect the AUD/USD to reach around 0.72 by the end of 2025, supported by the RBA’s hawkish stance and commodity prices. The Traders Union’s statistical models project an average of about 0.6875 at the end of 2026, rising further to 0.725 by 2027.

Conservatives (UBS) believe that global trade uncertainties and Fed policy shifts could limit the AUD’s upside, expecting the exchange rate to stay near 0.68 by year-end. CBA economists are cautiously optimistic, suggesting the AUD’s recovery may be short-lived, with a peak around March 2026 followed by a decline back toward previous levels by year-end.

Personal view: 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. Australia’s solid fundamentals and the relatively hawkish stance of the RBA are positives, but the structural strength of the dollar remains, preventing a sharp rise to 1.0. Short-term pressures mainly stem from Chinese data, while long-term positives include resource exports and a commodity cycle recovery.

Trading Strategies for the AUD: Opportunities for Both Directions

The AUD/USD pair offers high liquidity and strong volatility, making it relatively easier to identify medium- to long-term trends. This is why many investors choose to trade this currency pair. Traders can utilize forex margin trading to implement both long and short positions, leveraging leverage to amplify gains—seeking profits in bullish markets and potential opportunities in bearish phases. The barrier to entry is relatively low, suitable for small and medium investors.

However, it is important to remember that forex trading involves high risks, and investors may lose all invested capital. Proper risk management and stop-loss strategies are essential.

Summary of the AUD Outlook

As a commodity currency, the AUD is highly correlated with prices of copper, iron ore, coal, and other raw materials. In the short term, hawkish RBA policies and rising commodity prices provide support. But in the medium to long term, global economic uncertainties and the risk of a dollar rebound could limit upside potential.

For the AUD to break out into a genuine medium- to long-term bull trend, three conditions must be met simultaneously: the RBA returning to a hawkish stance, a substantial improvement in Chinese demand, and a structural weakening of the dollar. If only one or two of these are present, the AUD is more likely to remain range-bound rather than trend upward unilaterally. In the volatile environment of the FX market, the high liquidity and regularity of the AUD make medium- to long-term trend analysis relatively straightforward.