Australian Dollar gathers strength to near 0.7050 as Trump cancels Iran strikes
- AUD/USD drifts higher to around 0.7040 in Monday’s early Asian session.
- Trump said he cancelled planned military strikes against Iran.
- Markets continue to fully price in one more RBA rate hike this year.
The AUD/USD pair gains ground to near 0.7040 during the early Asian session on Monday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) on improved risk sentiment after the reports that US President Donald Trump holds off Iran strikes. Traders await the release of China’s RatingDog Manufacturing g Purchasing Managers Index (PMI) report, which is due later in the day.
Bloomberg reported that Trump cancelled planned military strikes against Iran on the basis of “rapidly” reaching a deal on its nuclear program and the full reopening of the Strait of Hormuz. Trump paused the strikes in expectation of a breakthrough and in response to requests from Iran and other countries in the region, he claimed on his Truth Social platform on Saturday.
Traders will closely monitor US-Iran developments. Any positive progress between two countries could provide some support to the riskier assets, such as the Aussie.
However, uncertainty remains high as Iranian officials said that Trump’s claim that Tehran had requested a pause “was nothing but a new lie” and that the Iranian armed forces were “on high alert and ready for any eventuality,” per Iran’s Mehr news agency. Ongoing tensions in the Middle East could boost the safe-haven flows, lifting the Greenback and acting as a headwind for the pair.
The Reserve Bank of Australia's (RBA) hawkish tone has prompted markets to continue to fully price in one more rate hike this year, which would take the Official Cash Rate (OCR) to 4.6%. RBA Governor Michele Bullock last week warned that underlying inflation remained too high and a further slowdown in domestic demand may be required to tame prices.
Bullock further stated that policymakers were prepared to raise interest rates again if needed. "The Board is prepared to act as required to achieve its mandate, including by increasing the cash rate further if needed,” said Bullock.
RBA keeps pressure on prices as labour market stays resilient
Analysts at BNY highlight that RBA Assistant Governor Sarah Hunter reiterated the need to maintain a restrictive stance, noting that inflation “remains above the 2-3% target band” and stressing that the RBA must “keep pressure on price growth so higher inflation expectations do not become entrenched.” On the labour side, BNY reports that Hunter characterised conditions as “still somewhat tight,” with job growth having held up “not too badly” over the first half of the year, underscoring the resilience of employment despite softer headline price data.
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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