Australian Dollar weakens below 0.7100 on Middle East uncertainties

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AUD/USD softens to around 0.7095 in Wednesday’s early Asian session.
Trump threatened to resume attacks on Iran in a few days if no deal is reached.
Members see a case for a rate hike as inflation expectations risk grows, RBA minutes showed.

The AUD/USD pair loses momentum to near 0.7095 during the early Asian trading hours on Wednesday. Geopolitical uncertainties and elevated crude oil prices weigh on the Australian Dollar (AUD) against the US Dollar (USD). Traders will closely monitor the release of the Australian April employment report, which is due on Thursday.

US President Donald Trump said on Tuesday that a new US attack would happen in the coming days if no agreement were reached. Trump on Monday stated that he had paused a planned resumption of hostilities following a new proposal by Iran to end the US-Israeli war.

Meanwhile, an Iranian official stated that the US threat of a massive assault at any moment will be met "resolutely," and Iran is “prepared to confront any military aggression”. Ongoing 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.

The People’s Bank of China (PBOC) on Wednesday decided to leave its Loan Prime Rates (LPRs) unchanged. The one-year and five-year LPRs were at 3.00% and 3.50%, respectively.

The Reserve Bank of Australia (RBA) minutes showed on Tuesday that eight of nine board members backed the May rate hike to 4.35%, citing rising inflation risks from the Gulf conflict. One member preferred to await further data.

“Members noted that inflation had been well above target in the months prior to the onset of the conflict in the Middle East,” the RBA minutes said. Members agreed that monetary policy could not prevent a near-term increase in the price level as higher fuel prices worked their way through to final prices.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.