Why is the Australian dollar continuously depreciating? An in-depth analysis of a decade of weakness and the turning point in 2026

The reason for the Australian dollar’s depreciation is never an overnight event but the result of multiple factors acting over the long term. Looking back over the past decade, the AUD has fallen over 35% from the 1.05 level in early 2013, while the US dollar index has risen 28.35%. The arrival of the “Strong Dollar Era” directly impacted the fundamentals of the AUD. Currently, with global risk sentiment turning, commodity cycles fluctuating, and the interest rate advantage diminishing, the AUD is struggling even more. To truly understand why the AUD finds it difficult to strengthen, we must first recognize these structural challenges.

The Three Main Culprits Behind the Long-Term Decline of the AUD

The AUD is the fifth most traded currency in the world, and the AUD/USD pair ranks fifth in global trading volume. Once, due to its high interest rates and commodity export advantages, the AUD was a hot target for speculative capital. But over the past ten years, the reasons for its depreciation have become increasingly complex.

First: Commodity Cycle Decline. Australia’s export structure is highly concentrated in iron ore, coal, and energy, which makes the AUD essentially a “commodity currency.” During China’s strong recovery from 2009 to 2011, the AUD rose close to 1.05; during the global commodities boom from 2020 to 2022, it briefly broke below 0.80. But since 2023, with China’s economic recovery weakening and demand for commodities declining, the AUD has entered a prolonged weak phase.

Second: Loss of Interest Rate Advantage. The AUD was once dubbed a “high-yield currency,” heavily reliant on its interest rate differential. In the past, the Reserve Bank of Australia (RBA) maintained significantly higher rates than the US, making it a prime target for arbitrage. However, with the US rapidly raising interest rates (the Fed began aggressive hikes at the end of 2022), the AUD/USD interest rate gap has narrowed. Currently, RBA’s cash rate is about 3.60%, still above the US federal funds rate, but the spread has shrunk considerably, reducing the appeal of carry trades.

Third: Structural Strength of the US Dollar. During a strong dollar cycle, not only does the AUD weaken, but the euro, yen, and Canadian dollar also depreciate against the dollar. This reflects ongoing global capital preference for US assets, especially Treasuries and tech stocks. As long as the dollar maintains its interest rate advantage and capital inflows, the AUD will find it hard to escape passive depreciation.

The Current Contradiction: Why Commodity Strength Cannot Save the AUD

In the second half of 2025, an interesting phenomenon occurred—iron ore and gold prices surged, and the Fed began cutting interest rates, which should theoretically benefit the AUD. The AUD/USD once rose to 0.6636, seemingly a strong rebound. However, this “phantom” rally did not last, and the overall appreciation of the AUD was only about 5-7%.

Why do commodity rebounds and a weakening dollar still fail to lift the AUD out of its weakness?

First, market confidence in the AUD remains limited. Every time the AUD approaches previous highs, selling pressure increases significantly, reflecting institutional and large investor pessimism about its long-term prospects. They know this may be just a rebound, not a reversal.

Second, US tariff policies create uncertainty for commodity exports. US tariffs have triggered global trade tensions, risking demand declines for raw materials (especially metals and energy), which in turn undermines the AUD’s commodity currency status.

Third, Australia’s domestic economy is not strong enough. Although Australia’s fundamentals are relatively stable, domestic growth is sluggish, and asset attractiveness is comparatively low. During times of rising risk aversion, capital tends to flow into the US dollar and gold rather than the AUD.

In short, the deep logic behind the AUD’s depreciation is that it behaves more like a “rebound-prone but trendless” currency. Without clear growth momentum or interest rate advantages, the AUD’s movements are more influenced by external factors than by its own fundamentals.

Three Key Indicators for Forecasting the AUD’s Trend

The AUD’s seemingly complex movement is actually driven by three core factors. Investors only need to understand the interaction among these to judge whether the AUD has the potential for sustained appreciation.

Indicator 1: RBA Interest Rate Policy—Can the Interest Rate Differential Re-establish Its Advantage?

The RBA’s monetary stance directly impacts the AUD’s attractiveness. Currently, the RBA’s cash rate is about 3.60%. Market expectations are shifting toward a possible rate hike again by 2026, with Commonwealth Bank of Australia (CBA) forecasting a peak around 3.85%.

If inflation remains sticky and the labor market stays resilient, a hawkish RBA stance could help rebuild the interest rate advantage, supporting the currency. Conversely, if rate hike expectations fade or economic data weaken, the AUD’s support will diminish.

Indicator 2: China’s Economy and Commodity Prices—External Drivers for the AUD

Australia’s export structure makes the AUD highly correlated with Chinese infrastructure and manufacturing activity. When China’s economy recovers, iron ore prices tend to rise, and the AUD quickly reflects this in the exchange rate. But if China’s recovery falters, even short-term commodity rebounds may be followed by declines, causing the AUD to “spike and fall.” This explains why the AUD’s movements are more synchronized with Chinese data than other currencies.

Indicator 3: US Dollar Trends and Global Risk Sentiment—Capital Flows

The Fed’s policy cycle remains central to global FX markets. In a rate-cut environment, a weaker dollar generally benefits risk currencies like the AUD. However, if risk aversion rises and capital flows back into the dollar, the AUD can weaken even without deteriorating fundamentals.

Given the high global economic uncertainty, sluggish energy prices, and weak global demand, investors tend to favor safe-haven assets over cyclical currencies like the AUD, limiting its upside.

In summary, for the AUD to break into a genuine medium- to long-term bull trend, three conditions must align: the RBA adopts a hawkish stance, China’s demand improves materially, and the dollar enters a structural weakening phase. If only one of these is present, the AUD is more likely to remain range-bound rather than trend upward.

Major Institutional Forecasts for 2026: Optimism vs. Caution

Different financial institutions have diverging views on the AUD’s future, reflecting varied market expectations.

Morgan Stanley’s optimistic forecast: They project the AUD/USD could rise to 0.72 by the end of 2026, supported by the RBA’s hawkish stance and strengthening commodity prices.

Traders Union’s neutral-to-optimistic model: It estimates an average of about 0.6875 (range 0.6738–0.7012) for 2026, rising further to 0.725 by 2027, emphasizing strong Australian labor markets and commodity demand recovery.

UBS’s conservative outlook: UBS believes that despite resilient domestic conditions, global trade uncertainties and potential Fed policy shifts could limit gains, expecting the AUD to stay around 0.68 by year-end.

CBA’s cautious view: Their latest report suggests the AUD’s rebound may be short-lived. They forecast a peak around March 2026, with a possible retreat by year-end, reflecting skepticism about sustained support.

Wall Street analysts’ warning: Some caution that if the US avoids recession but the dollar remains super-strong due to persistent interest rate differentials, the AUD may struggle to break above 0.67.

Based on current market conditions, the AUD is likely to trade sideways in the 0.68–0.70 range in the first half of 2026, influenced directly by Chinese data and US non-farm payrolls. From a personal perspective, the AUD is unlikely to crash sharply due to Australia’s solid fundamentals and the RBA’s relatively hawkish stance, but it also won’t surge to 1.0. Structural US dollar strength remains a key obstacle. Short-term pressures mainly stem from Chinese economic data, while medium- to long-term opportunities depend on resource exports and potential commodity cycle rebounds.

How Ordinary Investors Can Participate in AUD Trading

The AUD/USD is among the top five most traded forex pairs globally, with high liquidity and low spreads, making it very suitable for small and medium investors. Although predicting currency movements precisely is challenging, the AUD’s distinctive features and market liquidity make analysis more approachable.

Forex margin trading is the primary way to participate. Investors can go long or short, using leverage from 1:200, enabling profit opportunities in both bullish and bearish markets. The low entry barrier makes it accessible for investors with limited capital.

However, all investments carry risks. Forex trading is high risk, and investors may lose all their capital. It’s recommended to start with small amounts or demo accounts to familiarize oneself with AUD’s volatility and trading mechanics before scaling up.

Lessons from the AUD’s Depreciation

The complexity behind the AUD’s depreciation lies in the fact that it’s not caused by a single event but by the accumulation of multiple structural factors. The downtrend in commodity cycles, the loss of interest rate advantage, and the persistent structural strength of the US dollar form the three main culprits over the past decade.

As a commodity-exporting “commodity currency,” the AUD’s link to iron ore, coal, and energy prices remains strong. This dual nature—rapid rebound during commodity upswings and vulnerability during downturns—is both an advantage and a disadvantage.

In summary, short-term support comes from the RBA’s hawkish stance and strong commodity prices, but medium- to long-term risks include global economic uncertainties and potential US dollar rebounds. These factors will likely keep the AUD’s movements volatile and limited in upside.

While FX markets are inherently volatile and difficult to predict precisely, the AUD’s high liquidity, characteristic volatility, and economic structure make medium- to long-term trend analysis more manageable. For those seeking to understand the reasons behind the AUD’s depreciation and to seize investment opportunities, monitoring the RBA policy, Chinese economic data, and US dollar trends provides the key to understanding its future trajectory.