AUD/USD slips as USD rebounds, Oil and geopolitics in focus
- AUD/USD eases as USD stabilizes after recent weakness.
- Oil-driven inflation risks reduce the scope for near-term Fed rate cuts.
- Australian jobs data support hawkish RBA stance.
The Australian Dollar (AUD) trades under pressure against the US Dollar (USD) on Thursday, as the Greenback steadies after recent weakness, allowing AUD/USD to snap a four-day winning streak. At the time of writing, the pair is trading around 0.7155 after briefly approaching the 0.7200 level, last seen in June 2022, following the release of Australian employment data.
The US Dollar is stabilizing, with the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, snapping an eight-day losing streak to trade near 98.20 after rebounding from an intraday low of 97.83, its lowest level since March 2.
The rebound comes as geopolitical headlines surrounding the US-Iran conflict keep markets on edge. Gulf and European officials see a US-Iran deal taking up to six months to finalize, according to a Bloomberg report.
They are also urging an extension of the current ceasefire over that period and calling for the immediate reopening of the Strait of Hormuz to restore energy flows, warning that prolonged disruption could risk triggering a global food crisis.
Meanwhile, US and Iranian negotiators have reportedly scaled back ambitions for a comprehensive peace agreement and are instead pursuing a temporary memorandum aimed at preventing a renewed escalation, two Iranian sources told Reuters.
Investors remain cautiously optimistic about a potential deal, with US President Donald Trump saying the next meeting with Iran could take place over the weekend and that he would consider extending the ceasefire if necessary, while also warning that “if there is no deal with Iran, fighting will resume.”
As uncertainty persists and supply disruptions through the Strait of Hormuz continue, Oil prices remain elevated despite easing from recent highs, keeping inflation risks in focus and reducing the scope for near-term Federal Reserve (Fed) rate cuts.
New York Fed President John Williams said the Middle East conflict is already lifting inflation, adding that policy is “well positioned” despite challenges. Williams expects inflation to rise to around 2.75%-3% this year.
In Australia, the latest employment data offered mixed signals but broadly supported a still-resilient labor market, reinforcing the Reserve Bank of Australia’s (RBA) hawkish stance.
The economy added 17.9K jobs in March, slightly below expectations of 20K and down from the previous 49.7K gain, while the unemployment rate held steady at 4.3% for a second consecutive month.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
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