Australian Dollar faces heat from Iran conflicts-led risk-off mood
- The Australian Dollar underperforms its major peers as investors shift to safe-haven assets.
- IEA’s Birol warns that the Iran crisis is worse than the two oil crises of the 1970s combined.
- The RBA is expected to deliver one more interest rate hike by the end of August.
The Australian Dollar underperforms its major currency peers, is down 0.7% to near 0.6970 against the US Dollar (USD) in the early European trade on Monday. The AUD/USD pair plummets as the Australian Dollar (AUD) underperforms amid a heightened risk-off market mood, in the wake of escalating conflicts in the Middle East, which involve the United States (US), Iran, and Israel.
Australian Dollar Price Today
The table below shows the percentage change of Australian Dollar (AUD) against listed major currencies today. Australian Dollar was the weakest against the US Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.30% | 0.26% | 0.18% | -0.00% | 0.82% | 0.62% | 0.24% | |
| EUR | -0.30% | -0.03% | -0.07% | -0.30% | 0.65% | 0.31% | -0.06% | |
| GBP | -0.26% | 0.03% | -0.08% | -0.28% | 0.69% | 0.34% | -0.04% | |
| JPY | -0.18% | 0.07% | 0.08% | -0.17% | 0.64% | 0.36% | 0.05% | |
| CAD | 0.00% | 0.30% | 0.28% | 0.17% | 0.80% | 0.48% | 0.19% | |
| AUD | -0.82% | -0.65% | -0.69% | -0.64% | -0.80% | -0.33% | -0.58% | |
| NZD | -0.62% | -0.31% | -0.34% | -0.36% | -0.48% | 0.33% | -0.34% | |
| CHF | -0.24% | 0.06% | 0.04% | -0.05% | -0.19% | 0.58% | 0.34% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Australian Dollar from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent AUD (base)/USD (quote).
At the press time, S&P 500 futures are down 0.33% to near 6,487, extending its downfall after a 1.4% decline on Friday, indicating a dismal market sentiment. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.2% higher to near 99.70.
Middle East conflicts are resulting in fears of energy shortage and de-anchoring inflation expectations across the world. International Energy Agency (IEA) chief Fatih Birol said earlier in the day that “dozens of energy assets in the Middle East had been damaged in the war”. Birol added, “This crisis is worse than the two oil crises of the 1970s combined.”
On the monetary policy front, the Reserve Bank of Australia (RBA) raised its Official Cash Rate (OCR) by 25 basis points (bps) to 4.1%, as expected, and warned that inflationary pressures could accelerate further amid the energy crisis.
Markets imply a 50-50 chance the Australian central bank will hike again at its next meeting in May, and rates of 4.35% are fully priced by August, Reuters reports.
Meanwhile, the US Dollar trades firm amid risk-off sentiment, and the expectation that the Federal Reserve (Fed) will hold interest rates at their current level this year. Speculation that the Fed will adopt an “extended pause” stance is prompted by rising inflation projections amid higher oil prices.
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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