Can the Australian dollar sustain itself until 2026? Central bank disagreements, US dollar trends, and Chinese factors—three major uncertainties

In 2025, the Australian dollar performed unexpectedly well. Driven by tariff adjustments, a weakening US dollar, and resilient domestic economic fundamentals, the AUD/USD appreciated by a total of 7%, laying a solid foundation for investor optimism about the future.

But can this optimism continue into 2026? Several Wall Street institutions have offered differing opinions.

Diverging Central Bank Policies, Potential Gains for the AUD

The Reserve Bank of Australia (RBA) has become a focal point in the market. As inflationary pressures re-emerge, market expectations for the RBA’s policy stance in 2026 vary:

Westpac Bank expects the RBA to remain on hold, continuing to keep rates steady. Conversely, the Commonwealth Bank of Australia believes at least one rate hike is likely. Meanwhile, National Australia Bank and Citibank are more hawkish, forecasting two rate hikes in February and May, respectively.

Compared to the Federal Reserve, markets anticipate two more rate cuts in 2026 (JPMorgan’s outlook is more conservative, expecting only one).

This policy divergence is bullish for the AUD. When the RBA maintains or raises interest rates while the Fed continues easing, the interest rate differential widens, providing upward momentum for the AUD/USD. From a supply and demand perspective, higher Australian interest rates attract international capital inflows, boosting buying interest.

At the same time, as a high-yield currency, the AUD’s relative strength against the Chinese yuan is also noteworthy. In an environment of ample liquidity in Asian markets, the attractiveness of Australian assets could further increase.

Domestic Economic Resilience Supports Outlook, but China’s Uncertainty Remains

In 2025, Australia’s economy performed steadily—GDP growth improved quarter-over-quarter compared to last year, and unemployment remained stable. This resilience provides fundamental support for the AUD.

The OECD projects that, benefiting from improved household disposable incomes, Australia’s GDP growth in 2026 will reach 2.3%, accelerating further from 2025. However, the credibility of these figures faces challenges.

The key factor is China. Australia’s economy is highly dependent on commodity exports, with China being its largest trading partner. If China’s economic growth slows more than expected in 2026, it will directly impact demand for Australian exports, dragging down GDP growth and exerting pressure on the AUD exchange rate.

This link is crucial. Whether the AUD against the RMB can maintain its strength ultimately depends on the stability of Sino-Australian trade relations.

Geopolitical Black Swans and the Test of Risk Appetite

The AUD is a typical risk asset currency, with its fluctuations closely tied to global risk sentiment. When risk appetite rises, the high-yield AUD is favored. Conversely, during risk aversion, it becomes a target for selling.

Geopolitical risks in 2026 should not be underestimated:

• If US President Trump initiates another trade war, escalating global trade tensions and pressuring risk assets
• If conflicts in the Middle East or other regions intensify, prompting a shift to safe-haven assets
• Any sudden political or military events could trigger a contraction in global liquidity

Should these black swan events occur, the AUD/USD could face a gap-down risk.

How Do Institutions View the AUD Outlook for 2026?

Despite uncertainties, most Wall Street institutions remain bullish on the AUD:

JPMorgan expects robust Australian economic growth and stable RBA rates to support the AUD. Their target prices are 0.67 in Q1 and 0.68 by year-end.

Deutsche Bank is more optimistic. They believe the AUD’s relative interest rate advantage within G10 currencies will continue to widen, reaching 0.69 in Q2 and rising to 0.71 by year-end.

National Australia Bank adopts an even more aggressive stance, targeting 0.71 in Q2 and 0.72 in Q3.

Overall, institutions expect the AUD/USD to trend upward throughout 2026, though estimates vary. A conservative forecast places the year-end between 0.68 and 0.72.

Conclusion

The outlook for the AUD in 2026 hinges on three major variables: whether the RBA truly shifts to a hawkish stance, whether domestic economic growth can be sustained, and whether global geopolitical risks escalate. If rate hikes materialize, China’s economy avoids a slowdown, and US trade tensions do not intensify, the AUD could break through the 0.70 threshold. Conversely, issues in any of these areas could halt its rally.

Investors should closely monitor RBA meetings, Chinese economic data, and developments in Trump’s trade policies, as these are key catalysts influencing the AUD’s trajectory.