Why the Australian Dollar is 2026 High Flyer

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And the backdrop looks supportive of further gains.

It's still early doors, but the Australian dollar is the year's best performing G10 currency ahead of the rebounding U.S. dollar.

"This has come despite the turnaround in certain commodities. Iron ore started the year well but in recent days has corrected lower while momentum in gold is softening and there was a sharp drop in energy prices yesterday," says Derek Halpenny, Head of Research, Global Markets EMEA & International Securities at MUFG Bank.

MUFG analysis finds that outperformance is linked to expectations for the Reserve Bank of Australia to raise interest rates later in the year.

Money market pricing - gleaned from the OIS curve - shows approximately 40 basis points of hikes are expected from the RBA this year.

This supports Aussie bond yields and Australia's interest rate-linked products, making them look increasingly attractive to global investors in what is known as the carry trade.

In fact, research by RBC bank shows the Aussie dollar now enjoys the highest level of 'carry' in the G10, having recently surpassed the pound.

40bp worth of hikes means the market is effectively priced for nearly two full 25bp rate rises.

"That scale of tightening is the largest amongst all G10 central banks at the moment and underlines expectations of better economic conditions ahead," says Halpenny.

Recent data shows Australia's inflation rate is anchored well above the RBA's target and household spending data released this week showed a 1.0% m/m gain in November, which followed a 1.4% MoM gain in October.

Strong consumer demand will underpin those above-target inflation levels, and the RBA will judge higher interest rates can limit inflation's gains.

MUFG notes that RBA communications in December from Governor Bullock and in January from Deputy Governor Hauser indicated the RBA sees the next move more likely being a hike rather than a cut.

On January 08, Hauser said the RBA would be cautious when considering rate moves, but warned if consumption data was matched with better labour market data, a first hike would come sooner.

Above: AUD performance in 2026.

MUFG predicts that Australian consumer spending will be further supported this year by tax legislation already passed that will see the basic income tax rate cut from 16% to 15%.

Elsewhere, Halpenny notes that the performance of CNY is also helping provide support for AUD. "CNY is in fact the second-best performing Asian currency year-to-date."

"Trade data this week helped provide CNY with support," he adds. China exports jumped 6.6% y/y, helping lift the trade surplus to USD 11.4.1bn, up from USD 111.7bn.

MUFG thinks pressure to allow CNY to strengthen will continue to build.

"The fundamental backdrop looks supportive for further gradual AUD gains," says Halpenny.