Australian Dollar receives support after Trump extends ceasefire with Iran
- AUD/USD strengthens after Trump extends Iran ceasefire, easing Middle East escalation fears.
- US blockade on Iranian vessels persists after the second round of US-Iran peace talks collapsed.
- Retail Sales rose 1.7% MoM in March, accelerating from February’s 0.7% increase.
AUD/USD pares its recent losses from the previous day, trading around 0.7160 during the Asian hours on Wednesday. The risk-sensitive pair advances as the Australian Dollar (AUD) strengthens after US President Donald Trump extended the current ceasefire with Iran, easing fears of further escalation in the Middle East. Australia’s Westpac Leading Index for March will be eyed later in the day.
Bloomberg reported on Wednesday that President Trump will extend the ceasefire with Iran until negotiations between the two sides make progress. Trump’s statement marked a sharp shift in tone from earlier in the day, when he said, “I expect to be bombing” if Iran failed to meet his demands, adding the military was “raring to go.”
Nevertheless, the US blockade on Iranian vessels remains in place as plans for a second round of US-Iran peace talks collapsed. Reports indicated that Vice President JD Vance canceled a planned visit to Islamabad for negotiations after Tehran informed Washington via Pakistan that it would not attend the meeting.
However, the AUD/USD pair faced headwinds as the US Dollar (USD) gained support following stronger-than-expected US Retail Sales data released on Tuesday. The US Census Bureau reported that Retail Sales increased 1.7% month-over-month (MoM) in March, compared to the 0.7% rise (revised from 0.6%) recorded in February. The figure exceeded market expectations of 1.4%. On a YoY basis, Retail Sales rose 4.0% in March, matching February’s reading.
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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