UBS predicts the Australian dollar (AUD) will rally, targeting 0.70 against the U.S. dollar (USD) by early 2026. The firm expects the Reserve Bank of Australia (RBA) to implement 75 basis points of rate cuts through Q1 2026, while the U.S. Federal Reserve may cut rates by 100 basis points.
Recent market activity saw the AUD/USD pair drop from a nine-month high near 0.66 to below 0.6430, before recovering to around 0.65. UBS suggests this current level presents a potential for medium-term gains.
Support From RBA’s Approach
The anticipated support for the Australian dollar stems in part from a less forceful rate reduction path expected from the RBA. This approach could maintain a yield advantage for the AUD compared to the U.S. dollar.
Australia’s robust bond market, known for its depth and liquidity, may attract those looking to diversify their currency holdings. UBS considers this an appealing factor for those evaluating the AUD/USD pair.
We see the Australian dollar as being well-positioned for a move higher against the U.S. dollar. After touching a low near 0.6430, the pair has recovered to around 0.65, a level that we believe offers a compelling entry point. This provides a clear opportunity for traders to establish long positions.
The core of this view rests on diverging central bank policies. We anticipate the U.S. Federal Reserve will deliver 100 basis points in rate cuts through the first quarter of 2026, compared to only 75 basis points from the Reserve Bank of Australia. This narrowing interest rate difference should shift capital flows in favor of the Aussie dollar.
RBA’s Recent Decision
This outlook was reinforced by the RBA’s decision to hold its cash rate at 4.35% at its meeting yesterday, August 5th, 2025. Recent data shows Australia’s annual inflation is proving stubborn at 3.1%, still noticeably above the last US CPI reading of 2.8%. This gives the RBA less justification to begin an aggressive cutting cycle.
Supporting the currency further are Australia’s strong terms of trade. Iron ore prices, a critical export, have shown resilience, holding steady above $115 per tonne in recent months. This fundamental strength provides a solid floor for the currency even as the U.S. economy shows signs of slowing.
From a derivatives standpoint, this suggests traders should consider buying AUD/USD call options. Opting for expiry dates in late 2025 or early 2026 aligns with the timeline for the expected rally toward the 0.70 target. For a more conservative approach, a bull call spread would reduce the initial premium cost while still capturing upside.
We have seen a similar dynamic play out in the past, particularly in the years that followed the 2008 financial crisis. During that period, the RBA’s more hawkish stance relative to the Fed fueled a significant and sustained rally in the AUD. The current economic setup appears to be echoing that historical pattern of Australian dollar outperformance.
