Trade-weighted index

IBISWorld forecasts the trade-weighted index to climb by 1.6% in 2025-26, to 61.7 index points. While this represents an improvement from 2024-25, the trade-weighted index remains at a relatively similar level to that of the past decade. Persistent inflation pressures, fuelled by steady wage growth and low unemployment, are expected to encourage the RBA maintaining a strict monetary policy, keeping rates high relative to other central banks, like the US Federal Reserve, which have already begun rate-cutting cycles. While US interest rates appear to be on a clear easing path during 2025-26, the Reserve Bank of Australia has trimmed the cash rate once from 3.85% to 3.60% before pausing, adopting a more cautious stance, with rate hikes even a possibility. This divergence is expected to boost demand for the Australian dollar, pushing the exchange rate higher.

The slowdown of the Chinese economy has weighed on the Australian dollar over the past five years. Demand conditions for Australian exports have been volatile, as heightened trade tensions between the US and China and property-sector challenges in China have added to the uncertainty of the Chinese economy. As China significantly influences Australia's resource exports, economic downturns in China negatively impact demand for exports like iron ore and coal and the flow of foreign investment, particularly in resources and tourism, contributing to declines in the trade-weighted index. Still, sustained demand from Europe and emerging Asian economies like Japan and India have prevented further decline.

Over the past five years, the Australian Dollar has notably depreciated against the US Dollar, pushing down the trade-weighted index. The US Federal Funds rate rose beyond the RBA cash rate after a quick post-pandemic economic recovery caused persistent high inflation. This made the Australian dollar less appealing, causing it to depreciate, especially against the US dollar. Overall, IBISWorld forecasts the trade-weighted index to fall at a compound annual rate of 0.3% over the five years through 2025-26. Substantial increases in the Australian Dollar relative to the Japanese Yen due to the weakness of the yen have partially offset the decline.