Recently, I have been paying close attention to the trend of the Australian dollar, and I find that the story behind this currency pair is quite complex. As the fifth most traded currency globally, the AUD has high liquidity and low spreads, which should make it very attractive to investors, but its performance over the years has been less than ideal.

Why is the AUD becoming weaker? Simply put, Australia's economy is highly dependent on exports of bulk commodities like iron ore, coal, and copper, making it a typical commodity currency. When global raw material prices fluctuate, the AUD exchange rate tends to change dramatically. From early 2013 to 2023, the Australian dollar has depreciated over 35% against the US dollar, while the US dollar index has risen by 28.35% during the same period. This is not just an AUD issue; the euro, yen, and Canadian dollar have also depreciated against the dollar, indicating a broad-based strong dollar cycle.

The AUD used to be a high-yield currency, attracting a lot of hot money for carry trades. But in the past decade, aside from a rebound during the pandemic, it has mostly remained subdued. In the fourth quarter last year, the AUD/USD plunged sharply, with an annual decline of about 9.2%. At the beginning of this year, amid rising global trade tensions and recession fears, the AUD once fell to 0.5933, hitting a five-year low.

However, the situation is gradually changing. Since mid-last year, iron ore and gold prices surged, coupled with the Federal Reserve cutting interest rates, which drove funds into risk assets, causing the AUD to fluctuate higher. At one point, the AUD/USD rose to 0.6636, reaching a new high since November of that year. The logic behind this rebound warrants in-depth analysis.

Whether the AUD can recover mainly depends on three key factors. First is Australia’s economic condition and the central bank’s policy. The Reserve Bank of Australia (RBA) has been emphasizing inflation pressures, stating that it will only consider further easing after confirming inflation enters a sustainable downward trajectory. This cautious stance will provide some support to the AUD in the short term. Second is the strength of the US dollar. Although the Fed is cutting rates, the chairman’s comments have cooled market expectations for further rate cuts. The dollar index has rebounded about 3% from around 96 in summer, with a break above 100 becoming more likely. When the dollar strengthens, the AUD often weakens, showing an inverse correlation.

The third factor, perhaps the most critical, is China’s economic recovery. Australia’s resource exports are highly dependent on China, with key commodities like iron ore, coal, and natural gas. When China’s economy is strong, it significantly boosts Australian resource exports and prices, directly increasing market confidence in AUD assets. Conversely, if China’s economy slows, especially with continued weakness in the property sector, the AUD will lose an important support.

Regarding AUD/RMB forecasts, major financial institutions have divergent views. Morgan Stanley previously projected the AUD/USD could rise to 0.72, mainly based on the possibility of the RBA maintaining a hawkish stance and commodity prices strengthening. UBS’s outlook is more conservative, citing ongoing uncertainties in global trade and potential changes in Fed policy that could limit AUD gains. CBA economists are more cautious, believing the AUD’s recovery might be short-lived, expecting it to fall back after reaching a high.

From the perspective of AUD/RMB, the trend closely follows that of AUD/USD, but because RMB fluctuations are relatively muted, the decline might be slightly smaller. Stable China-Australia trade relations have a positive impact on this exchange rate pair, but the RMB itself is heavily influenced by Chinese central bank policies and US-China relations. If the RMB weakens due to domestic economic pressures, the AUD/RMB exchange rate could see a short-term uptick.

In the short term, the AUD/USD is expected to fluctuate between 0.63 and 0.66. If inflation data continues to be favorable and the economy remains stable, it might test above 0.66. Conversely, if global risk appetite deteriorates or the dollar rebounds, the AUD could fall back toward 0.63. The medium-term direction depends on the Fed’s policy shifts and whether global trade risks ease.

As a commodity currency, the AUD’s volatility is indeed significant, which also means there are plenty of trading opportunities embedded within. Whether bullish or bearish, the market offers participants ample choices. The key is to closely monitor economic data releases, central bank policy moves, and commodity price changes, as these are the core variables influencing AUD/RMB forecasts. Currently, it is advisable to focus on range trading, follow through on breakouts, and remain flexible to adjust strategies according to market sentiment shifts.