Australian Dollar strengthens above 0.7000 on RBA hawkish stance
- AUD/USD gains momentum to around 0.7010 in Wednesday’s early Asian session.
- Rising oil prices could cement a fourth RBA rate rise this year if US-Iran conflicts are not resolved within weeks.
- The US has launched the 11th night of Iran strikes as diplomacy falters.
The AUD/USD pair gathers strength to near 0.7010 during the early Asian trading hours on Wednesday. The Australian Dollar (AUD) strengthens against the US Dollar (USD) as the likelihood of the Reserve Bank of Australia (RBA) interest rate hike rises. Australia’s Employment report for June will take center stage later on Thursday.
After delivering three consecutive 25 basis points (bps) hikes earlier this year, the Australian central bank decided to hold the Official Cash Rate (OCR) steady at 4.35% at its June policy meeting.
Nonetheless, the ongoing US-Iran conflict has triggered energy-driven inflation fears. This has fueled speculation that the RBA will tighten policy further, supporting the Aussie. Traders raise their bets on an RBA rate hike since airstrikes resumed last week, now pricing in nearly a 23% chance of a hike in August and more than a 50% probability by December, according to the Guardian.
Traders await the release of the Australian June employment data on Thursday. Markets expect employment to rise by 15,000 jobs, while the Unemployment Rate is forecast to hold steady at 4.4% for a second consecutive month. If the report shows stronger-than-expected outcomes, this could lift the Aussie against the USD.
The US military has launched an 11th consecutive night of strikes against Iran, with explosions reported in northwestern Iran’s Tabriz region. Late Tuesday, Iran's top joint military command said that Tehran will expand its strikes and target the US and its allies' interests across the region if the US attacks Iran's nuclear sites, per Xinhua news agency. Rising tensions in the Middle East could boost safe-haven flows, benefiting the Greenback in the near term.
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.
