The Australian and New Zealand dollars both depreciated against the US dollar in 2025, but the paths they took and the drivers behind those movements tell distinctly different stories about the two economies.

The Australian dollar started 2025 at around USD 0.67 and is ending the year near USD 0.64, representing a roughly 4.5% decline. However, this headline number obscures significant intra-year volatility. The AUD peaked in mid-March at USD 0.69 before declining steadily through the middle of the year and stabilising in Q4.

Iron ore prices explain much of the AUD’s movement. The currency strengthened in Q1 2025 as iron ore prices rallied on Chinese stimulus hopes, then weakened as those hopes faded and prices declined. By the second half of the year, iron ore had stabilised but at levels that didn’t support a stronger currency. The correlation between iron ore prices and the AUD remains alive and well.

The New Zealand dollar’s path was more consistently downward. Starting 2025 at around USD 0.63, the NZD is finishing the year near USD 0.59, a decline of approximately 6.3%. The NZD’s weakness reflects New Zealand’s more pronounced economic slowdown and the Reserve Bank of New Zealand’s earlier move toward a less restrictive policy stance.

Against each other, the cross rate (AUD/NZD) appreciated from around 1.06 at the start of the year to approximately 1.08 currently. This 2% move might seem small, but it matters for trans-Tasman trade and investment flows. Australian exporters to New Zealand benefited from the more favourable exchange rate, while New Zealand exporters to Australia faced headwinds.

Central bank policy divergence played a supporting role in the currency movements. The Reserve Bank of Australia maintained a more hawkish stance throughout most of 2025, keeping rates on hold while signalling they remained data-dependent. The RBNZ, facing earlier evidence of economic slowing, shifted to a more dovish stance mid-year. Interest rate differentials moved in Australia’s favour, providing some support to the AUD/NZD cross rate.

Both currencies weakened significantly against the US dollar in Q2 and Q3 as the Federal Reserve maintained higher-for-longer messaging and US economic data continued surprising to the upside. The US dollar strength was the dominant global currency story of 2025, and the AUD and NZD couldn’t escape the broader trend.

What’s interesting is how both currencies performed against other commodity currencies. The AUD outperformed the Canadian dollar in 2025, appreciating approximately 3% against the CAD. This reflects Australia’s more diversified commodity export base and stronger Asian demand linkages. Against the Norwegian krone, the AUD was roughly flat, while the NZD depreciated about 4% against the NOK.

Volatility measures for both currencies increased in 2025 compared to 2024. The AUD’s 90-day realised volatility averaged around 9.5% in 2025, up from 8.2% in 2024. The NZD showed even more pronounced volatility at 10.8%, reflecting its smaller, less liquid market and greater sensitivity to global risk sentiment shifts.

Currency hedging behaviour by corporates evolved during 2025. Australian and New Zealand exporters increased their hedge ratios, with many maintaining coverage of 60-70% of expected USD revenue 12 months forward, up from 45-55% in previous years. This shift reflects the heightened uncertainty around currency movements and the desire to lock in more predictable cash flows.

The carry trade dynamics around both currencies were interesting in 2025. Neither the AUD nor NZD offered particularly attractive carry relative to volatility, resulting in reduced positioning by international macro funds. Speculative positioning in both currencies, as measured by futures markets, remained relatively light throughout the year.

Looking at purchasing power parity metrics, both currencies appear undervalued against the USD at current levels. The AUD trades roughly 8% below its long-term PPP estimate, while the NZD sits about 10% below. However, PPP is a poor short-term forecasting tool, and these valuations don’t necessarily mean the currencies will strengthen in the near term.

The trade-weighted indices for both currencies tell a more nuanced story than the USD crosses alone. Australia’s trade-weighted index declined about 3% in 2025, less than the AUD/USD decline, because the AUD strengthened against several Asian currencies. New Zealand’s TWI fell roughly 5%, more closely tracking the NZD/USD movement.

Corporate treasury teams in both countries had to navigate challenging conditions in 2025. The combination of currency volatility and elevated hedging costs made cash flow forecasting more difficult. Some firms responded by accepting more currency exposure rather than paying the premium for hedging, while others locked in longer-dated coverage to reduce rollover risk.

Looking forward to 2026, currency forecasters are generally expecting modest AUD and NZD appreciation against the USD, but with significant uncertainty around those base cases. The median forecast for end-2026 sits around USD 0.66 for the AUD and USD 0.61 for the NZD. However, the range of forecasts is wide, reflecting genuine uncertainty about commodity prices, central bank policy paths, and global economic conditions.

What 2025 demonstrated clearly is that both currencies remain highly sensitive to external factors—commodity prices, Chinese economic conditions, US dollar strength—rather than being driven primarily by domestic fundamentals. This isn’t new, but the magnitude of the external influences in 2025 was a reminder that smaller open economies have limited ability to insulate their currencies from global forces.