Australian Dollar pares recent losses despite Middle-East conflict
- AUD/USD rebounds from recent losses despite heightened global risk aversion.
- Joint US-Israeli strikes killed Iran’s Supreme Leader Ayatollah Ali Khamenei, marking a major escalation in the Middle East.
- Australia’s TD-MI Inflation Gauge fell 0.2% MoM in February, the first drop since last August.
AUD/USD recovers after opening at a gap down, trading around 0.7070 during the Asian hours on Monday. The risk-sensitive pair plunged as risk aversion heightened after the United States (US) and Israel carried out coordinated strikes on Iran over the weekend.
The joint US-Israeli operation reportedly killed Supreme Leader Ayatollah Ali Khamenei, marking a pivotal moment for Iran. US President Donald Trump said US military operations in Iran are “ahead of schedule,” according to CNBC.
Australia’s TD-MI Inflation Gauge fell 0.2% month-on-month (MoM) in February, reversing a 0.2% rise in the previous month and marking the first decline since last August. Traders will likely observe China’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) later in the day. It is worth noting that any change in the Chinese economy could impact the AUD as China and Australia are close trading partners.
The AUD/USD pair may further lose ground as the US Dollar Index (DXY) rose to six-week highs, trading around 98.00 at the time of writing. The safe-haven demand for the Greenback improves amid the Middle-East conflict.
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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