Australian Dollar is Now the Yield King

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And that means potential FX outperformance.

"AUD is now the highest yielding currency in G10," says RBC.

The observation made by the investment bank's currency research team reveals a significant source of support the Australian dollar can depend on in the opening plays of 2026.

In a note to clients, RBC says "AUD is now the highest yielding currency in G10... we recommend taking a long AUDCHF position over the full year of 2026."

Carry describes where a country's interest rates offer superior returns to global and local investors than is the case in peer countries. Often, investors will borrow in low interest rate currencies and invest in high-yielding currencies.

In this case, the AUD would be the beneficiary of this trade.

"We are bullish on FX Carry trades," says RBC, saying it is one the top five FX themes for 2026.

At the end of last year, AUD overtook the GBP as the G10 currency with the highest 'carry' advantage:

It's worth pointing out that the closeness in AUD and GBP carry perhaps explains why GBP/AUD is proving resistant to breaking below the big 2.0 barrier on repeated occasions over recent weeks.

For that to happen, the pound's carry appeal must fall, which will happen when markets start to bet on further interest rate cuts at the Bank of England.

This highlights that central bank policy is crucial to 'carry' - falling rates bring down bond yields and lower interest rates across an array of financial products.

While the profile for the UK is one of lower rates, the opposite is true of Australia, where the Reserve Bank of Australia has effectively signalled it is done with cutting rates, and markets are betting that a 25 basis point hike awaits in 2025. This has bolstered Aussie interest rates over recent weeks and coincides with AUD gains.

But it's not just rates bolstering the Aussie, as surging metals prices are said by analysts to be beneficial for Australia, which is one of the world's biggest raw commodity exporters.

"The AUD enjoyed strong gains in December thanks to buoyant local data and the commodities rally," say FX analysts at Barclays.

Asia's cyclical economic improvement is also a potential boon to this China-tied currency.

"Australia and the AUD is very correlated to the broad Asian cycle, holding a 60% correlation to CNY. While we are bullish on the region given the announced fiscal stimulus from Japan and expected fiscal stimulus from China, Australia and the AUD is in a unique position having just recently become the highest yielding assets for developed markets," says RBC.

Yet, despite the positives stacking up behind AUD, positioning now looks to be a headwind to further near-term gains.

This helps explain the inability of some key AUD exchange rates to break fresh ground; a prime example being GBP/AUD's failure to break below 2.0.

"Long AUD positions are by now more crowded," says Barclays, adding that being 'long' the currency is a consensus position.

Oftentimes, a well-subscribed consensus view and crowded one-way positioning prove technical headwinds to a currency's progress.