Australian Dollar loses ground below 0.7150 despite hawkish RBA stance
- AUD/USD declines to near 0.7120 in Friday’s early Asian session.
- Iranian officials said "no tangible progress" had been made in talks in Washington.
- RBA's Bullock reiterated the monetary policy board will do what’s necessary to achieve its mandate.
The AUD/USD pair loses momentum to around 0.7120 during the early European session on Friday. The Australian Dollar (AUD) softens against the US Dollar (USD) amid a cautious mood and ongoing conflict in the Middle East. The US May employment report will be in the spotlight later on Friday.
Iran’s Foreign Minister Abbas Araghchi said Wednesday that "no tangible progress" has been made in negotiations to end the Middle East war. Araghchi further stated that lines of communication with Washington were still open but warned that any attack by Israel on the Lebanese capital, Beirut, as part of its campaign against Hezbollah would trigger a "full-scale resumption" of the US-Iran conflict.
Traders will closely monitor the developments surrounding US-Iran peace negotiations. Uncertainty and any signs of rising tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the pair in the near term.
Reserve Bank of Australia (RBA) Governor Michele Bullock on Thursday maintained a hawkish tone. She emphasized that the central bank remains strictly focused on curbing inflation, following three interest rate hikes earlier this year that pushed the cash rate to 4.35%. Bullock added that inflation is too high, and the board will do what it considers necessary to achieve our mandate to deliver price stability and full employment.
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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