Above: AUD performance in 2026.
AUD is 2026's star performer, but the rally will face challenges from here.
This is according to Corpay, an international payments specialist, who warns on Friday that supportive "domestic and offshore forces could progressively turn into headwinds."
Peter Dragicevich, Currency Strategist for APAC at Corpay, says markets are now well prepared for a quickening in Australian inflation because of the surge in fuel prices and second-round effects on areas such as travel, logistics and construction.
This points to the Reserve Bank of Australia (RBA) tightening policy further over the coming months, but crucially for AUD, "this is largely factored in."
Another RBA interest rate hike on 5 May is assigned a ~75% chance, with ~69bps of tightening baked in by next March.
"Higher Australian interest rates support a higher average level for the AUD relative to the past few years," says Dragicevich. The Aussie has advanced against nearly all its G10 peers, with only the Norwegian Krone outdoing it.
But this does "not necessarily" mean "more AUD upside."
"We don’t believe the looming growth hit from petrol prices and interest rates has been given that much thought by FX participants. Neither have the global growth challenges generated by the Middle East conflict, particularly on activity across Asia," explains Dragicevich.
He tells clients this shaky growth environment "could act as a ceiling on the AUD and progressively take some of the heat out of the currency down the track."
Corpay estimates AUD is also overvalued, tracking ~2.0% above its fair value estimates at a time when the market is already heavily exposed to the 'long' Aussie trade.