Four trends shaping Australia’s FY26 economy and FX market

Foreign exchange (FX) volatility, rising international tariff rates and geopolitical instability may have once been temporary disturbances, but they are now baked-in features of the global economy. Despite this shift, CommBank economists are cautiously optimistic about Australia’s outlook over the coming financial year. With the Reserve Bank of Australia (RBA) having delivered a series of rate cuts through 2025, the domestic economy is forecast to remain resilient and inflation is likely to settle within the target band.                                                                            

While some lingering effects from recent cost-of-living pressures are anticipated, there is growing confidence that a return to more normal conditions is on the way. Economists have flagged that domestic factors such as housing dynamics, progress on energy transition policy and business confidence will also influence Australia’s economic performance over the next year.

FX markets are another key focal point. Here are the key takeaways from CommBank’s FY26 Outlook:

Prepare to navigate a drastically different landscape

The relative stability and prosperity of the “Great Moderation” has given way to a more turbulent environment reminiscent of the 1970s. Heightened geostrategic competition, particularly between the US and China, is reshaping trade relations, driving tariffs higher and reversing globalisation.

These structural changes have profound implications for investors and businesses. The era of predictable, low-volatility growth is over, replaced by an environment in which markets must price in more frequent shocks, from tariff announcements to regional conflicts. CommBank Economists anticipate this instability will persist into the near future.

While major powers have shown restraint in avoiding complete economic decoupling, as shown by the US and China stepping back from full trade war escalation, risks remain heightened and may reach flash point quickly. This makes extreme downside scenarios less likely, but investors would do well to price in higher baseline volatility and maintain greater diversification across geographies and asset classes.

US trade policy will continue to drive global economic dynamics, with President Trump expected to continue reshaping trade relationships through higher tariffs. The resultant slowdown in global economic growth is expected to improve in the first half of 2026.

Brace for a bumpy ride as tariffs reshape the global economy

Reflecting this structural shift, the US has upended the global goods trading system by increasing tariffs on most of its imports. As of mid-2025, aggregate U.S. import tariffs have risen sharply. Yale University’s Budget Lab¹ estimates the effective average has climbed from around 2.5% in 2024 to nearly 19–20% depending on methodology. With the potential for further hikes, global trade faces a significant reset.

Joseph Capurso, Head of International Economics and Foreign Exchange at CommBank, explains that US imports of goods from Australia attract a tariff rate of 10%. It is a much lower rate than tariffs on goods from other economies. “Australian businesses may increase sales to the US where Australian-made goods compete with goods made in other economies that attract a higher tariff rate,” he explains. “However, Australian businesses may lose sales to the US where Australian-made goods compete with US-made goods.”

“Australian businesses may increase sales to the US where Australian-made goods compete with goods made in other economies that attract a higher tariff rate. However, Australian businesses may lose sales to the US where Australian-made goods compete with US-made goods.” - Joseph Capurso, Head of International and Sustainable Economics, CommBank

Overall, these tariffs function as an “uncertainty tax” which makes business investment and trade planning more difficult. It also dampens confidence across economies closely tied to global supply chains. Currently, only 6% of Australian exports go to the US. “There will be an adjustment period for Australian businesses to get used to the new US tariff,” says Capurso. “But the tariff rate is unlikely to change much from here.”

Expect further volatility in FX markets

Shifts in US policy have undermined investor confidence in US assets and this is reflected in broad US dollar weaknesses against the euro, Japanese yen and British pound. Despite this, the Australian dollar has failed to benefit significantly. As a highly liquid commodity currency, the AUD remains sensitive to trade and geopolitical tensions, as well as China’s structural slowdown, which has put the brakes on demand for the metals that dominate Australian exports. While these factors have capped upward momentum, the currency has held relatively steady in recent months.

Capurso indicates that the Australian dollar will remain vulnerable to tariff-related shocks, as the Aussie dollar typically falls when the outlook for the global economy deteriorates, such as in response to new tariff announcements. “For example, the Australian dollar slumped by 7% in early April when President Trump unexpectedly announced high tariffs on all imports and the Chinese government retaliated against US tariffs,” he says.

However, other influences are important for the Australian dollar such as falling commodity prices, in large part because of weak growth in the Chinese economy. “In addition, the difference in expected interest rate in Australia and the US can also influence the Australian dollar,” adds Capurso. Looking ahead, it’s expected US interest rates will fall more quickly than is currently priced by the market, supporting the Australian dollar. 

Capurso noted that although the US is still in talks with China, Canada and Mexico, most of its trade negotiations have already been completed. “It will take time for businesses to adjust to the tariff decisions already made,” he says. “US importers will review where they source goods to find which economies are now the lowest-cost producers. We expect the Australian dollar to increase over time as the global economy recovers from the tariff shock.”

“It will take time for businesses to adjust to the tariff decisions already made. US importers will review where they source goods to find which economies are now the lowest-cost producers. We expect the Australian dollar to increase over time as the global economy recovers from the tariff shock.” - Joseph Capurso, Head of International and Sustainable Economics, CommBank

Prepare for critical transition points in the Australian economy

Despite the global headwinds, the outlook for Australia’s domestic economy presents as positive overall. Successful navigation of the “narrow path” has brought inflation under control without a significant rise in unemployment. Although the predicted 25 basis points rate cut predicted for July did not eventuate, the 25 basis points rate cut in August 2025 has brought the cash rate to a more neutral level. According to the latest RBA data, this is currently 3.6%.

A challenge for the local economy lies in transitioning from public to private sector-driven growth. Consumer behaviour will be critical, as households “scarred” by recent cost-of-living pressures have shifted their focus away from spending towards saving and paying down debt. Even if disposable incomes increase, they may remain reluctant to loosen the purse strings, especially if global volatility continues to erode their confidence. However, early indicators suggest some positive forward momentum, with CommBank data showing increased spending on discretionary categories including recreation and hospitality. 

As interest rate cuts and lower inflation flow through to household budgets, CommBank expects a step up in household discretionary spending supporting a lift in real GDP growth to rates of around 2.3% by the end of FY26 (compared to current rates of 1.3%).