What could change the AUD’s direction in the coming months?

Beyond domestic monetary policy, traders should monitor three external factors that could significantly influence the Australian dollar: China’s economic performance, commodity prices and broader international risk sentiment.

China: A key driver of Australian export demand

China is Australia’s largest trading partner, making developments in the world’s second-largest economy particularly important for the Australian dollar. 

According to Australia’s Department of Foreign Affairs and Trade (DFAT), two-way goods and services trade between the two countries reached A$326 billion in 2025, representing 25% of Australia’s total trade. Australian exports to China amounted to A$196 billion, equivalent to 29% of the country’s total goods and services exports. This close relationship means that changes in Chinese industrial activity, infrastructure investment and domestic demand can have significant consequences for Australia’s export revenues and economic outlook.

The relationship is particularly important for iron ore, one of Australia’s largest exports. China is the world’s biggest steel producer and a major destination for Australian iron ore. Consequently, demand for steel in Chinese construction, infrastructure and manufacturing industries has a direct influence on iron ore prices and Australia’s mining revenues. However, China’s property market remains a source of concern. 

According to the National Bureau of Statistics of China, real estate development investment fell by 20.6% year-on-year between January and September 2026. New property construction starts declined by 24.9%, while sales of newly built commercial properties fell by 13.2%. This prolonged downturn is weighing on steel demand and complicating the outlook for iron ore prices.

Other economic indicators paint a more mixed picture. Chinese industrial production increased by 5.5% year-on-year in September, while GDP expanded by 4.6% during the first three quarters of 2026. However, fixed-asset investment declined by 7.2% over the January-September period, with infrastructure investment down 4.2%. This divergence suggests that industrial activity remains relatively resilient, but investment-related demand continues to face headwinds.

For Australia, the implications can be significant. A prolonged slowdown in Chinese construction and infrastructure investment could reduce demand for Australian raw materials, putting downward pressure on iron ore prices, mining export revenues and the terms of trade. This could weigh on the Australian dollar, particularly if weaker Chinese demand coincides with deteriorating domestic economic conditions in Australia. Conversely, stronger Chinese infrastructure spending, a recovery in property investment or more resilient manufacturing activity could support demand for Australian commodities. Any improvement in Chinese economic momentum could therefore provide an external source of support for the AUD, even if Australia’s domestic economy remains under pressure.

Commodity prices and their influence on the Australian Dollar

Commodity prices represent another important transmission channel between the global economy and the Australian dollar. As a major exporter of natural resources, Australia benefits when international prices for its key exports increase, as higher export revenues can improve its trade balance and terms of trade.

The Reserve Bank of Australia identifies a close historical relationship between the terms of trade and the Australian dollar. The terms of trade measure the ratio of export prices to import prices. When export prices increase relative to import prices, Australia’s terms of trade generally improve, supporting national income and potentially attracting foreign investment. This tends to favour an appreciation of the Australian dollar. Conversely, declining commodity prices can reduce export revenues and put downward pressure on the currency.

Iron ore is particularly important in this relationship. According to the Australian Department of Industry’s September 2026 Resources and Energy Quarterly, iron ore export earnings are forecast to decline from A$107 billion in 2026-2027 to A$96 billion in 2027-2028, before falling to A$79 billion by 2030-2031 in real terms. The department attributes the expected decline to rising global supply and softer demand, including weaker Chinese steel production.

However, the outlook for Australia’s overall commodity exports is more nuanced. Total resources and energy export earnings are forecast to increase from approximately A$403 billion in 2025-2026 to A$422 billion in 2026-2027, partly reflecting elevated energy prices and stronger gold revenues. This illustrates why traders should monitor a broader basket of Australian export commodities rather than relying exclusively on iron ore prices.

Coal and liquefied natural gas (LNG) are also important contributors to Australian export income. Their prices are influenced by global energy demand, supply disruptions and geopolitical developments. For instance, disruptions to energy supplies in the Middle East have contributed to higher energy prices, supporting Australia’s projected export earnings. Gold provides another source of diversification, with its price influenced by global investment demand, central-bank purchases and movements in real interest rates.

For AUD traders, the distinction between individual commodity markets matters. A decline in iron ore prices driven by weaker Chinese construction demand could weigh on the currency, even if higher LNG or coal prices partly offset the impact on Australia’s overall export revenues. Conversely, a broad-based increase in commodity prices could improve the country’s terms of trade and reinforce demand for the Australian dollar.

Global risk appetite remains an additional influence

Finally, international risk sentiment remains important. The Australian dollar is generally considered a risk-sensitive currency, meaning it tends to benefit when investors favour growth-oriented assets and seek exposure to economies with strong trade and commodity links. During periods of financial market stress, however, investors often reduce exposure to risk-sensitive currencies and favour defensive assets such as the US dollar and Japanese yen.

This relationship can sometimes outweigh domestic monetary policy developments. Even if Australian interest rates remain relatively attractive, a deterioration in global risk appetite could limit AUD gains or trigger additional selling pressure.

What should AUD traders watch next?

The previous external influences mean that traders should avoid interpreting the Australian dollar exclusively through the lens of RBA policy. A relatively hawkish central bank may not be sufficient to support the currency if Chinese demand weakens, commodity prices decline or international investors become increasingly risk-averse.

The next phase of the Australian dollar’s performance will depend on the interaction between domestic inflation, economic growth and external demand. Rather than focusing on individual data releases in isolation, traders should assess whether incoming figures are changing expectations for the RBA’s future policy decisions.

Australian inflation releases will remain particularly important. Another upside surprise in trimmed mean inflation could revive expectations of additional monetary tightening, supporting the AUD through higher expected interest rates. Conversely, a sustained moderation in underlying price pressures could reinforce the view that the November increase marked the end of the current tightening cycle, potentially reducing the currency’s yield advantage.

Employment data will provide another indication of how much pressure higher borrowing costs are placing on the economy. A faster-than-expected increase in unemployment, particularly alongside weaker household consumption, could strengthen expectations of future rate cuts and weigh on the Australian dollar.

Housing indicators should also remain on traders’ radar. Further declines in dwelling values, mortgage lending and property transactions would reinforce concerns about household confidence and domestic demand. However, a stabilisation in house prices could reduce downside risks to consumption and improve the economic outlook, even without an immediate recovery in property values.

Developments in China will be equally important. Traders should monitor Chinese GDP growth, industrial production, infrastructure investment, property market activity and steel production. These indicators can provide early clues about future demand for Australian iron ore and other industrial commodities. Monthly commodity prices and Australia’s export forecasts published by the Department of Industry can also help assess whether changes in global demand are translating into higher or lower export revenues.