Australian Dollar softens to near 0.7150 as Middle East tensions rise
- AUD/USD weakens to around 0.7155 in Tuesday’s early Asian session.
- Traders await progress on Middle East peace talks.
- The US May jobs report will be the highlight on Friday.
The AUD/USD pair loses ground to near 0.7155 during the Asian trading hours on Tuesday, pressured by broader geopolitical uncertainties. Traders await Middle East ceasefire developments and key economic data from both Australia and the United States (US). Australia’s Gross Domestic Product (GDP) report for the first quarter (Q1) is due on Wednesday. The US May Nonfarm Payrolls (NFP) data will be in the spotlight on Friday.
Reserve Bank of Australia (RBA) board member Ian Harper said on Tuesday that inflation persistence remains a significant issue. Harper further stated that market indicators of inflation expectations rise, causing concern.
Iran’s state media said on Monday that Tehran had suspended talks over Israel’s actions in Lebanon. Separately, US President Donald Trump stated that he believes an agreement to reopen the Strait of Hormuz and extend the ceasefire with Iran is reachable “over the next week.” Any signs of escalating tensions in the Middle East could undermine the riskier assets, such as the Australian Dollar (AUD) against the US Dollar (USD).
Markets are betting the US Federal Reserve’s (Fed) next move will be to raise its benchmark interest rate, compared with expectations for a rate cut before the start of the Iran war, given rising energy prices and the impact they will have on inflation.
The US jobs report will take center stage on Friday as it could help sway the Fed's policy path in the near term. The data are expected to show a gain of 85,000 jobs in May and no change in the current 4.3% unemployment rate.
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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