Published: January 7th, 2026
For much of the past decade, the Australian dollar (AUD) has seemed determined to disappoint. Commodity booms fizzled, China experts slowed, and domestic growth lost momentum. Now that 2026 is underway, several large banks are arguing that the currency's weakness could soon give way to something sturdier.
National Australia Bank (NAB), one of the country's largest lenders, wrote this week that “the stars look aligned for better AUD levels into year-end,” even as they acknowledged that recent reversals have made investors wary.
HSBC has made a long-AUD, short-GBP position to one of its core trades for 2026. Both banks believe markets have been slow to accept how much Australia's monetary outlook has diverged from that of its peers.
The frustration is understandable. In early December the Aussie appeared poised to break higher. AUD/USD touched 0.6686, while sterling slipped to the psychologically charged level of 2.0 Australian dollars. That combination should, on most fundamental models, have opened the door to further gains. Instead, both moves stalled. The currency retraced, reinforcing its reputation as a perennial false starter.
NAB's explanation: when risk appetite sours, the Aussie tends to bear the brunt. In November, jitters over frothy valuations in America's AI sector sent global equities lower. The Australian dollar followed them down. The episode, NAB says, remains “a little too fresh in the memory”.
That sensitivity to risk has long been a handicap. AUD can behave as a proxy for global growth, even when domestic conditions are improving. Yet NAB argues that this time the market is underestimating the pull of rates.
Since late October, interest-rate differentials have moved decisively in Australia's favour. The trigger was the release of third-quarter inflation data, which surprised on the upside and forced a rethink of the Reserve Bank of Australia's (RBA) trajectory. Expectations for the cash rate between now and late 2026 have edged higher. More subtly, the entire yield curve has shifted relative to America's, making Australian assets more attractive across maturities.
On NAB's estimates, these changes are consistent with AUD/USD trading “a couple of cents higher” than current levels, above 0.67. At the time of writing, the rate sits around 0.66. A move to 0.67 would likely drag GBP/AUD back towards 2.0, and perhaps below it.
Those projections assume that markets will soon price what central banks have signalled. The argument relies on familiar mechanics rather than a heroic revival in growth.
For the rest of 2026, NAB's forecasts grow bolder. It expects AUD/USD to break above 0.70, reaching 0.69 by March and 0.72 by September. Against Sterling, the bank sees AUD/GBP at 0.51 by March and 0.52 by September, equivalent to GBP/AUD levels of roughly 1.96 and 1.92.
HSBC reaches a similar conclusion from the opposite direction. In its year-ahead foreign-exchange outlook, the bank argues that Britain's rate advantage is eroding. Softer labour-market data and cooling inflation should, it says, eat away at Sterling's buffer. Money markets already expect another cut from the Bank of England by April.
Australia's core inflation remains stubborn, helped by the introduction of a comprehensive monthly consumer-price index that has delivered a string of hotter-than-expected prints. The labour market has loosened only gradually. This is why HSBC believes the RBA has effectively abandoned its cutting cycle; the next move, it suggests, is more likely to be up than down. With market pricing already hawkish, that stance should put a floor under the currency.
Sceptics, however, point to recent surprises. In late September a national employment survey showed that Australia had shed 5,400 jobs in August, confounding expectations of a robust increase. Markets reacted swiftly. The Aussie slid against almost all its G10 peers. GBP/AUD jumped above 2.05, and AUD/USD dipped, as traders inferred that a weakening labour market would force the RBA's hand.
The disappointment was sharp because it followed a brief burst of optimism. In late August and early September, a run of better data had convinced investors that the economy was stabilising just as the Federal Reserve began to ease in America. The Aussie rallied. Then employment, the RBA's preferred barometer of underlying health, spoiled the mood.
The episode illustrated the currency's fragility, but also the market's tendency to extrapolate too much from a single release. Employment data are noisy. One month does not make a trend.
Michele Bullock, the RBA's governor, has tried to dampen such overreactions. Appearing before parliament, she described inflation as being in a “very good position”, restrained by earlier rate rises. Yet she emphasised the risks on both sides. Loosen policy too quickly and price pressures could re-emerge; tighten too much and demand could falter.
On geopolitics, Ms Bullock was less equivocal. America's escalating tariffs on Chinese imports, she warned, threaten Australia's largest trading partner. Any slowdown in China would ripple through Australian exports and financial markets. “Markets,” she observed pointedly, “have not fully priced in these risks.”
Most economists expect it to hold the policy rate at 3.6% in the near term, after August's quarter-point cut. Yet holding steady is itself a signal in a world where other central banks are edging towards easier money.
Some strategists argue that something more durable is at work. Analysts at Bank of America contend that AUD is in the early stages of a structural rebound. After peaking more than a decade ago, plunging to pandemic lows and then clawing back in fits and starts, the currency may finally be escaping its downtrend.
None of this guarantees a smooth rise. The Aussie remains vulnerable to swings in global sentiment and to shocks from China. Another bout of equity-market turbulence would test investors' resolve. And Australia's own economy is hardly booming.
Still, the balance of probabilities has shifted. Where once the Australian dollar was discounted for good reason, it is now arguably underpriced relative to its fundamentals. That is why banks as cautious as NAB and HSBC are willing to stick their necks out.
