Australian Dollar advances above 0.7050 as US and Iran announce a peace deal
- AUD/USD gains traction to near 0.7075 in Monday’s early Asian session.
- The US and Iran said they have reached a deal to end the nearly four-month war.
- RBA is expected to hold its cash rate at 4.35% at its June policy meeting on Tuesday.
The AUD/USD pair gathers strength to around 0.7075 during the early Asian session on Monday. The reports that the United States (US) and Iran announced a peace deal to bring their nearly four-month war to an end underpin the riskier asset, such as the Australian Dollar (AUD) against the US Dollar (USD). The Reserve Bank of Australia (RBA) interest rate decision will take center stage later on Tuesday.
Bloomberg reported on Sunday that Washington and Tehran have reached a deal to reopen the Strait of Hormuz, with both sides declaring the immediate and permanent termination of military operations on all fronts, including in Lebanon.
Iran's National Security Council confirmed a ceasefire agreement with the US, adding that final deal talks to start after the other party fulfills commitments under the memorandum of understanding. Iranian officials said the maritime blockade against Iran would end immediately and entirely. Iran's Mehr News Agency stated that the US naval blockade will lift completely within 30 days and the Strait of Hormuz will reopen within 30 days under Iranian arrangements.
The Reserve Bank of Australia (RBA) will announce its next interest rate decision on Tuesday. The Australian central bank is likely to keep its key interest rate unchanged for the first time this year, with money markets paring bets on further tightening.
Traders will closely monitor whether RBA Governor Michele Bullock signals some comfort at the current rate or keeps the door open to further moves to counter stubborn price pressures. Fading expectations of additional interest rate hikes by the RBA might cap the upside for the Aussie in the near term.
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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