Recently, a question that is often asked is why the Australian dollar has been weakening for so many years, and whether it can rebound. I have organized some thoughts to share my views on the forecast of the AUD's trend.

First, let's state a basic fact: the Australian dollar is the fifth most traded currency globally, and the AUD/USD currency pair is particularly active, with high liquidity and low spreads, making it suitable for short-term or medium- to long-term positioning. However, in recent years, the performance of the AUD has not been very impressive.

The AUD has a special identity called a "commodity currency" because the Australian economy heavily relies on exports of bulk commodities like iron ore, coal, and copper. Therefore, fluctuations in global raw material prices often cause sharp changes in the AUD exchange rate. This is also why the AUD was once considered a high-yield currency and a popular target for arbitrage trading.

But over the past decade, the AUD has generally underperformed. Starting from around 1.05 in early 2013, the AUD/USD has depreciated over 35% by 2023, while the US dollar index has risen by more than 28%. The euro, yen, and Canadian dollar have also depreciated against the dollar, indicating a comprehensive strong dollar cycle. From both technical and fundamental perspectives, the AUD is in a disadvantageous position, making it difficult for it to stabilize at high levels even after rebounds.

Entering Q4 2024, the AUD performed even worse, with an annual decline of about 9.2% against the dollar. By early 2025, amid rising global trade tensions and recession fears, the AUD briefly fell to 0.5933, hitting a five-year low. Analysts pointed out that the main reason was U.S. tariffs impacting global trade, leading to a decline in raw material exports, directly weakening the appeal of the AUD as a commodity currency. The interest rate advantage between Australia and the U.S. was also diminishing, with the domestic economy remaining weak and capital continuing to flow out.

However, in the second half of 2025, the situation began to change. Driven by soaring iron ore and gold prices, along with market expectations that the Federal Reserve would cut interest rates, investor risk appetite increased, and the AUD rebounded. By September, the AUD/USD once rose to 0.6636, reaching a new high since November 2024. Although there was some pullback in the past two months, it has remained above 0.64.

So, can the AUD still recover? That depends on several key factors.

First is Australia’s economic condition and the central bank’s policy. In Q3 2025, Australia’s CPI rose 1.3 month-over-month, higher than the 0.7 in the previous quarter and exceeding market expectations. The Reserve Bank of Australia has repeatedly emphasized that core inflation pressures in housing construction and services are more stubborn than expected, and it will only consider easing policies once inflation enters a sustainable downward trajectory. This means the probability of rate cuts is decreasing, and in the short term, this policy stance could support the AUD, making it more attractive than currencies that are about to cut rates.

Second is the trend of the U.S. dollar. Although the Fed may cut rates in 2025, signals from the chair have been quite cautious, dampening market expectations for subsequent rate cuts. The dollar index has shown unexpected resilience since bottoming out this summer, rebounding about 3%, and the possibility of breaking the 100 psychological level is increasing. Generally, when the dollar strengthens, the AUD tends to weaken, and the two often move inversely.

The third important factor is China’s economy. Australia’s economic structure is highly dependent on resource exports, with China being its largest buyer. The health of China’s economy directly influences demand for Australian iron ore, coal, natural gas, and other raw materials. When China’s economy is strong, it boosts resource exports and prices, strengthening market confidence in the AUD. Conversely, if China’s economy slows or the property market remains weak, it will dampen long-term demand expectations for raw materials, and the AUD will lose support.

Regarding forecasts for the AUD’s trend, major financial institutions have differing views. Morgan Stanley once projected the AUD could rise to 0.72, mainly based on the possibility of the RBA maintaining a hawkish stance and commodity prices supporting the currency. UBS is more conservative, believing that global trade uncertainties and Fed policy changes could limit the upside, with a forecast around 0.68. Some institutions are even more cautious, suggesting that the AUD’s recovery might be only temporary, with a peak possibly in March 2026, followed by a decline.

From a technical perspective, the AUD/USD is currently fluctuating between 0.63 and 0.66 in the short term. If inflation data continues to be positive 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 to 0.63 or lower. In the medium term, a trend-following strategy is more suitable, with key attention on the RBA’s policy shifts and the dollar’s movement. If expectations of Fed rate cuts increase, the AUD could surge toward 0.6550–0.6600. But if the U.S. economy proves more resilient and the Fed delays rate cuts, the dollar might regain strength, and the AUD could dip toward 0.6250.

For a long-term outlook on the AUD, my suggestion is that if you are optimistic about the currency, you can build positions gradually at lows, using time to smooth out market volatility. Currently, the AUD/USD is in a phase of technical oscillation and fundamental tug-of-war, mainly trading within a range. A breakout could be followed by trend-based entries. Ultimately, the long-term direction depends on signals of the Fed’s policy shift and whether global trade risks ease.

In summary, the AUD’s exchange rate is quite volatile, and investors should closely monitor CPI, economic data, and commodity prices. The future direction of the RBA’s meetings is also crucial. If global risk events decrease and inflation softens, the AUD is likely to gradually strengthen. However, given the complex current environment, it’s advisable to be cautious about short-term fluctuations and adjust positions dynamically based on multiple market signals.