Image © Adobe Images
Commerzbank says it now expects the Aussie to depreciate against the U.S. dollar and the euro.
The Australian dollar was the second-best performing G10 currency in the first half of 2026, but that outperformance is set to fade, says a new research piece.
Analysts at Commerzbank, the German multi-national banking giant, say the Australian economy looks set to cool noticeably in the coming months, and that puts paid to any further interest rate rises at the Reserve Bank of Australia (RBA).
In fact, economists think rate cuts will soon enter the discussion; "this is likely to remove an important source of support for the Australian dollar, which is expected to come under pressure in the coming months," says Commerzbank.
The Aussie economy entered the Middle East conflict running hot, with domestically-generated inflation running ahead of the RBA's target at 2.0%, prompting three interest rate rises.
Those hikes were a response to a genuinely strong economy, making them unambiguously supportive of the currency.
Why A Rates Advantage Matters
International capital chases superior returns; that's an intuitive reality of the modern world where money can easily cross borders.
Investors tend to borrow where interest rates are low and invest where that money offers a greater yield. Currently, Australia offers the highest real yield in the G10.
That's a magnet for the currency.
But the Economy is Set to Slow
The hot Aussie economy was the fundamental source of support for Australia's yields and the currency, but it's starting to cool.
Growth has decelerated sharply as the economy grew just 0.3% in Q1 2026, down from 0.9% at the end of 2025, with GDP up 2.5% over the year.
More tellingly, GDP per person fell 0.1% in the quarter; if that repeats in Q2, Australia tips into a per-capita recession, meaning the average Australian is going backwards even if headline GDP stays positive.
Image: Commerzbank.
"A rising cash rate and higher energy prices have taken their toll on the Australian economy in recent months. While energy prices are coming down again, this likely only means that the central bank will refrain from further interest rate hikes," says Commerzbank.
The NAB Business Confidence Indicator fell to -29 in March, its lowest level since the pandemic began.
"In combination with the Iran-conflict, this monetary tightening is already weighing on business and consumer sentiment," says Commerzbank.
RBA Rate Cuts
So noticeable will be Australia's growth slowdown, Commerzbank reckons simply holding rates won't suffice, cuts will be needed to provide support.
"We therefore expect the RBA to cut the policy rate again by next year at the latest (we anticipate two cuts), and we expect the market to price this in over the remainder of the year," say analysts.
The AUD's yield advantage will be eroded if the RBA holds interest rates unchanged and other countries raise rates. Think of the U.S. and the Federal Reserve.
They will be eroded further and quicker if the market starts to price in rate cuts, particularly before other central banks.
In short, the AUD's 'carry trade' magnetism might be on the wane.
"This tailwind is now likely to reverse, making the outlook for the Australian dollar more challenging. Interest rate cuts next year, combined with persistently weak economic growth, will weigh on the AUD in the coming months," says Commerzbank.
Commerzbank says it now expects the Aussie to depreciate against the U.S. dollar and the euro.
AUD Can Still Shine: ING
However, rates aren't all that matters, says ING's FX Strategist, Francesco Pesole, who says a softer rates story won't be enough to deny AUD strength later in H2.
"While risks persist, easing global pressures and a gradual slowdown support expectations the RBA will stay on hold for now. That shouldn't prevent AUD gains in 2H," he says.
He explains that much will depend on what the Fed does, and that some near-term caution by U.S. policy makers can pose a headwind.
Pesole explains that "further out, we expect some dovish repricing of the Fed in the second half as the US domestic narrative softens. That should gradually shift focus back to AUD fundamentals - terms of trade, carry, and the growth and fiscal mix. We don't think another RBA hike is a necessary condition for AUD/USD to return to 0.73 this year."
A recovery in AUD/USD would likely assist AUD against the other majors.