The rally in global stock indices has spurred demand for the Australian dollar as a high-yield currency and improved financial conditions. The neutral rate should be higher. Moreover, the AUD/USD pair enjoys even more growth drivers. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The RBA may increase its key rate in 2026.
- Stronger Chinese yuan supports the AUD/USD.
- Stock indices are helping the Australian dollar.
- Long positions on the AUD/USD pair can be opened with targets of 0.667 and 0.672.
Weekly Fundamental Forecast for Australian Dollar
Slow and steady wins the race. The Reserve Bank of Australia is well aware of this. Between February and August, it lowered its key rate only three times to 3.6%, a level last seen in April 2023, while other regulators did so much more frequently. The RBA’s measured approach ensured a soft landing for the economy. Today, its acceleration, coupled with rising consumer prices, is fueling rumors of a tightening of monetary policy in 2026. Against this backdrop, the AUD/USD pair is rallying.
RBA and Other Central Banks’ Interest Rates
Source: Bloomberg.
What should the neutral rate be? One that neither stimulates nor restrains the economy? According to RBA International Department Head Penelope Smith, external factors must be taken into account. The rally in global stock indices has eased financial conditions in Australia. The current cash rate of 3.6% may accelerate inflation and GDP growth, even though it previously appeared to be a restraining factor.
At the same time, the growth of the S&P 500 improves global risk appetite and supports the Australian dollar as a high-yield currency in carry trade operations. Given expectations of a cut in the federal funds rate and the Christmas rally in the US stock market, the outlook for the AUD/USD looks bullish.
The aussie is buoyed by the strongest year for the Chinese yuan since 2020. The renminbi has gained 4% against the US dollar since the beginning of January, thanks to support from the authorities in the form of daily fixing, capital inflows into the growing stock market, and confidence that China will be able to avoid tariffs. The situation is radically different from the first trade war between Washington and Beijing. At that time, USDCNH quotes surged by 13% from their low in March 2018 to the high in September 2018. The Australian dollar is a proxy currency for the yuan, and the strengthening of the latter creates a tailwind for AUD/USD quotes.
Nevertheless, aussie bulls still benefit from the divergence in monetary policy. After Australian core inflation accelerated to 3.3% in October, the futures market shifted its expectations from a cash rate cut to a rate hike. It seems quite reasonable given Bloomberg’s forecast of economic growth accelerating to 0.7% q/q and 2.2% y/y.
Australian Inflation Rate
Source: Bloomberg.
According to UBS, consumer prices in 2026 will exceed the upper limit of the RBA’s target range of 2–3%. National Australia Bank warns that, given current capacity, the economy cannot expand further without generating higher inflation. Improvements in the labor market will force the Reserve Bank to increase interest rates.
Weekly AUDUSD Trading Plan
Therefore, the rally in global stock indices, the gains of the Chinese yuan, and the divergence in monetary policy between Australia and the US suggest buying the AUD/USD with targets of 0.667 and 0.672.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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