Australian Dollar gains momentum above 0.7150 on US-Iran peace deal hopes
- AUD/USD gathers strength around 0.7160 in Monday’s early Asian session.
- The US and Iran are close to signing an agreement that involves a 60-day ceasefire extension, senior US officials said.
- Surprise rise in Australia’s Unemployment Rate will give RBA more reason to delay further rate hike at the June meeting.
The AUD/USD pair gains momentum to near 0.7160 during the early Asian session on Monday. The reports that the United States (US) and Iran are closing in on a deal that would reopen the Strait of Hormuz provide some support to the riskier asset such as the Australian Dollar (AUD) against the Greenback.
Bloomberg reported on Sunday that the US and Iran have signaled progress in talks to end the war and would reopen the Strait of Hormuz, even as US President Donald Trump said he won’t “rush” into an agreement.
The US officials stated that nothing is ready to be signed as combatants remain at loggerheads over Tehran’s enriched uranium stockpile and tolls on the strategically vital Strait of Hormuz. Traders will closely monitor the developments surrounding the US-Iran peace deal, and any signs of progress could underpin the Aussie in the near term.
Markets slash chance of more interest rate hikes from the Reserve Bank of Australia (RBA) after a surprise rise in the jobless rate. Australia’s Unemployment Rate jumped to 4.5% in April from 4.3% in March, registering the highest in about four and ha halfyears.
The probiability of a rate hike at the next meeting dropped to just 3%, from 13% before the release of the employment report, according to financial market pricing provided by Westpac.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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