Key Highlights

  • The trade-weighted index stood at 65.1 on the eve of the November decision.
  • The RBA assumes the index holds near 65.3 throughout its forecasts.
  • The flat currency assumption is a technical starting point rather than a prediction.
  • Exchange rates are notoriously hard to predict, so the assumption can change.

Exchange rates are notoriously hard to predict, and the Reserve Bank of Australia (RBA) does not attempt a currency forecast. Instead, its forecasts in the November 2026 Statement on Monetary Policy (SMP) assume that the trade-weighted index (TWI) stays flat at about 65.3 for the whole projection period, which runs to the end of 2028.

The latest market reading is a touch below that. At 4.00 pm on 2 November 2026, the RBA homepage recorded the TWI at 65.1. The two numbers are close, but they are different things: one is an observed market value, the other a forecasting assumption.

What the TWI measures

Most people know the Australian dollar through its value against the US dollar. The TWI takes a broader view. It measures the Australian dollar against a basket of currencies, weighted by their importance in Australia's trade. A higher TWI means the Australian dollar has strengthened against that basket; a lower one means it has weakened.

The RBA's 2 November market snapshot showed:

  • TWI: 65.1
  • AUD/USD: 0.7023
  • AUD/CNY: 4.6691
  • AUD/JPY: 110.86
  • AUD/EUR: 0.6284

Because trade with many countries matters, the TWI is a better guide than any single bilateral rate to how the currency affects Import prices across the economy.

Why a flat assumption?

The SMP states the TWI assumption without forecasting any movement in the currency. Holding the Exchange Rate flat means the projections are not built on a view about whether the Australian dollar will rise or fall. In effect, any change in the outlook from one forecast round to the next then reflects other forces, such as demand, wages and energy prices, rather than an assumed move in the currency.

The TWI sits alongside two other key conditioning assumptions in the November forecasts:

  • The cash rate. The path is based on market pricing as at 28 October 2026, implying a rise of about 35 basis points by mid-2027 before stabilising at 4.8 per cent in 2028. This is market pricing, not an RBA promise.
  • Oil. Brent Crude is assumed at US$109.5 a barrel in December 2026, falling to US$79.1 by December 2028.

Each assumption is a starting point, not a prediction. If the actual exchange rate, oil price or Interest Rate path diverges materially from what was assumed, the forecasts would be expected to change too.

Why the currency matters for inflation

The exchange rate affects Inflation mainly through import prices. When the Australian dollar strengthens, imported goods and services become cheaper in local terms, which tends to dampen inflation. When it weakens, the reverse happens.

That link is especially relevant now because energy prices are a large part of the inflation story. Oil is priced in US dollars, so the Australian dollar's value against the greenback influences what local consumers pay for fuel. The RBA's December quarter 2026 oil price assumption is 35 per cent higher than in August.

The latest inflation figures show the scale of the challenge:

  • Headline CPI: 4.3 per cent over the year to September 2026 (monthly measure) and 3.9 per cent over the year to the September quarter.
  • Trimmed mean (underlying): 3.7 per cent over the year to the September quarter, and 1.0 per cent in the quarter, up from 0.8 per cent in the June quarter.

The RBA forecasts headline inflation to peak at 4.5 per cent in the December quarter of 2026, with headline and underlying inflation both above 3 per cent until the end of 2027. Both measures are forecast to reach the 2.5 per cent midpoint of the target range in mid-2028. Those forecasts assume the TWI holds at about 65.3.

Movements in the Australian dollar also show up in the RBA's Commodity price data. The preliminary Index of Commodity Prices for October 2026 rose 12.5 per cent over the year in special drawing rights (SDR) terms, but only 4.6 per cent in Australian dollar terms. In October alone, it fell 1.3 per cent in SDR terms and 0.3 per cent in Australian dollar terms.

The gap between the SDR and Australian dollar measures over the year is consistent with the Australian dollar having appreciated against the currencies in the SDR basket. That illustrates how the exchange rate can cushion, or amplify, the local impact of global price changes.

A rate decision in a stable-currency world

On 3 November, the Monetary Policy Board raised the cash rate target by 25 basis points to 4.85 per cent, the fifth increase of 2026. The statement noted that "The increases in the cash rate target since the beginning of the year have tightened financial conditions." The SMP adds that the Board judges financial conditions to be restrictive, though the extent is uncertain, and that government bond yields are at multi-year highs.

The majority's reasoning centred on inflation expectations: "there is an increasing risk that higher inflation expectations will become embedded." Six members voted to raise and three voted to hold at 4.60 per cent. The statement gives no reasons for the minority view.

The Board also acknowledged that the outlook is clouded: "There continue to be heightened uncertainties about the outlook for domestic economic activity and inflation." Among the upside inflation risks identified in the SMP are a prolonged energy disruption and strong AI-related investment.

The difference between the 2 November reading of 65.1 and the assumed level of about 65.3 is small. It does not, on its own, signal a meaningful change in the outlook. The more important point is what the assumption represents: the RBA's forecasts are conditional on a currency that neither rises nor falls.

If the Australian dollar were to move significantly in either direction, that condition would no longer hold, and the inflation outlook would shift with it.

The bottom line

The TWI was 65.1 on 2 November 2026, close to the roughly 65.3 level the RBA assumes will hold flat through its forecasts to the end of 2028. That assumption, together with market pricing for the cash rate and a declining oil price path, underpins the RBA's projection that inflation returns to the 2.5 per cent midpoint in mid-2028.

A flat exchange rate is a technical starting point rather than a prediction. With the Board's next decision due on 8 December 2026 and the next CPI release on 25 November, the currency remains one of several moving parts in the outlook.