AUD/USD bounces up but remains below 0.6500 on risk-off markets
- The Aussie Dollar is trimming losses after a sharp decline on risk-aversion.
- Israel's attack on Iran has boosted the US Dollar and other safe assets.
- The pair is struggling to return above a previous support zone at 0.6500.
The Australian Dollar is trimming some losses following a sharp decline earlier today as news that Israel bombed Iranian nuclear and military sites triggered a rush for safety, sending risk-sensitive assets, like the AUD, tumbling.
The AUD/USD depreciated nearly 1% during Friday’s early trading to hit one-week lows right above 0.6450. The pair is attempting to regain lost ground during the European trading session, yet upside attempts are being capped below a previous support level at the 0.6500 area.
Tensions in the Middle East have crushed risk appetite
Israel attacked Iran with unprecedented strength earlier on Friday, hitting nuclear sites in Tehran and killing Revolutionary Guard officials. Iran reacted by launching a drone attack on Israel and walking out of the nuclear talks with the US scheduled for the next Sunday.
The risk of a regional conflict in the Area adds a new layer of uncertainty to an already troubled global economic outlook. The US-China trade deal failed to convince investors earlier this week, and Trump has threatened to impose higher tariffs on all partners if a deal is not reached before July 9—a highly adverse scenario for the risk-sensitive AUD.
In the macroeconomic front, Australian Consumer Inflation expectations jumped to 5% in June, from 4.1% in May, pushing back hopes of a July rate cut. In the US, on the other hand, soft PPI figures confirmed that the impact of tariffs on prices is yet to come, and kept hopes of a Fed cut in September alive.
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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