Can the Australian dollar's outlook continue? The US dollar and geopolitical factors are key variables.

The Australian dollar performed well in 2025. Under the combined effects of tariff adjustments, a softening US dollar, and resilient domestic economy, the AUD appreciated by about 7% against the USD. As we enter 2026, whether this upward momentum can continue depends on how three key factors evolve: divergence in central bank policies, domestic growth momentum, and the global risk environment.

Divergence in Central Bank Policies May Be the Main Driver

Australia’s inflation pressures have surfaced, and the market generally believes that the RBA’s rate cut cycle has ended. However, there are differing views on future rate hikes—Westpac expects the RBA to remain on hold, Commonwealth Bank anticipates one rate hike, while National Australia Bank and Citibank are optimistic about two hikes (in February and May).

In contrast, the Federal Reserve is expected to cut rates twice in 2026, while JPMorgan is more conservative, expecting only one rate cut. This policy divergence favors the AUD—if the RBA maintains or tightens policy while the US remains easing, the widening interest rate differential will naturally boost the AUD’s value.

Domestic Economic Resilience Supports the Floor, but China’s Variable Cannot Be Ignored

In 2025, Australia’s economy performed steadily, with GDP growth exceeding expectations and unemployment remaining low. The OECD forecasts a 2.3% GDP growth in 2026, further accelerating from 2025, mainly supported by a rebound in household disposable income.

However, there is a hidden risk—Australia’s economy is highly dependent on commodity exports, and China is its largest trading partner. If China’s growth slows more than expected in 2026, it will directly drag down Australian exports and economic prospects, putting pressure on the AUD.

Risk Sentiment Dominates Short-Term Fluctuations

The AUD is a typical risk asset currency, which tends to attract buying when global risk appetite rises and be sold off during risk aversion. In 2026, two black swan events should be watched: one is a renewed escalation of US trade policies, and the other is worsening geopolitical hotspots in the Middle East and elsewhere. Both scenarios would dampen risk appetite and negatively impact the AUD.

Institutions Generally Bullish, Target Price Range Clear

Based on the assessments of major investment banks, the outlook for the AUD/USD has become a consensus for an upward trend. JPMorgan expects it to reach 0.67 in Q1 and fall back to 0.68 by year-end. Deutsche Bank is more optimistic, believing the AUD’s interest rate advantage among G10 currencies will widen, with a forecast of 0.69 in Q2 and 0.71 at year-end. National Australia Bank is the most bullish, estimating it will rise to 0.71 in Q2 and further to 0.72 in Q3.

Overall, the AUD in 2026 is supported by relatively ample factors—central bank policy space, economic growth momentum, and a relative advantage over the USD. However, investors should remain cautious of two potential disruptions: China’s economic slowdown and geopolitical conflicts.