Australian Dollar softens below 0.7200 amid ongoing Middle East tensions
- AUD/USD weakens to near 0.7180 in Monday’s early European session.
- Ongoing Middle East tensions drag the Australian Dollar lower.
- Traders reduce their bets on further rate hikes from the RBA.
The AUD/USD pair loses momentum to around 0.7180 during the early European trading hours on Friday. Rising tensions in the Middle East weigh on the riskier assets such as the Australian Dollar (AUD) against the US Dollar (USD). The US May ISM Manufacturing Purchasing Managers Index (PMI) report is due later on Monday.
Kuwait's armed forces said that the country's air defense systems were intercepting hostile missile and drone attacks after air raid sirens sounded and emergency alerts were issued nationwide, the Guardian reported on Monday.
Iranian Foreign Minister Abbas Araghchi said over the weekend that talks and message exchanges with the US were ongoing but highlighted that no assessment of negotiations could be made until a clear outcome was reached.
Traders will closely watch the US May jobs data on Friday as the US Federal Reserve (Fed) officials signal that the central bank may need to raise rates if the war accelerates already-high inflation. Economists expect the US Nonfarm Payrolls (NFP) to rise by 96K in May, and the US Unemployment Rate is projected to remain steady at 4.3% during the same period.
"USD will be heavily influenced by developments in the U.S.-Iran war and the U.S. nonfarm payrolls report for May," said Joseph Capurso, head of FX at Commonwealth Bank of Australia.
On the Aussie front, a softer-than-expected domestic inflation report and a surprise rise in jobless rate slash bets for a June interest rate hike from the Reserve Bank of Australia (RBA). The chance of a rate increase at the RBA's next meeting dropped to just 3%, from 13% before the release of the employment report, according to financial market pricing provided by Westpac.
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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