Australian Dollar softens below 0.7000 as US–Iran conflicts escalate
- AUD/USD declines to near 0.6975 in Monday’s early Asian session.
- US- Iran conflict escalates as the US announced another troop was killed.
- Softer US inflation data led traders to cut bets on imminent rate hikes from the Fed.
The AUD/USD pair edges lower to around 0.6975 during the early Asian session on Monday. The Australian Dollar (AUD) extends the decline below the 0.7000 psychological level due to escalating tensions in the Middle East.
The Guardian reported that US Central Command (CENTCOM) announced another death of a service member as it launched more airstrikes at Iran on Sunday in response to the killing of American troops. The US military said the service member was killed in Iraq on Saturday during the “controlled detonation” of a downed Iranian drone.
Both sides have been accused of striking critical infrastructure in recent days. Meanwhile, Washington has reimposed its blockade of Iranian ports and Tehran has declared the Strait of Hormuz closed and targeted US allies in the region. Ongoing conflict between the US and Iran could boost a safe-haven currency such as the Greenback and act as a headwind for the pair.
Softer-than-expected US consumer and producer inflation data released last week have dampened the US Federal Reserve (Fed) rate-hike bets. This, in turn, could weigh on the USD against the Aussie.
The probability for a Fed rate hike in July stood at 14%, versus a 25% implied chance last week, according to the CME FedWatch tool. Traders are pricing in 30 basis points (bps) of hikes by December.
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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