Australian Dollar picks up above 0.7000 as risk aversion eases
- AUD/USD bounces up strongly on Monday and returns above 0.7000.
- Rumours of efforts to de-escalate Iran's conflict have soothed investors' fears of an all-out war.
- The US Dollar remains on its back foot amid fading hopes of immediate Fed rate hikes.
The Australian Dollar (AUD) appreciates against the US Dollar (USD) on Monday, as comments from Iranian Foreign Minister Esmaeil Baghaei offered a glimmer of hope for de-escalation in Iran and pushed Oil prices down from one-month highs. The AUD/USD pair has jumped above 0.35% on the day, returning above 0.7000 and potentially printing a bullish engulfing candle in the daily chart.
US launched a series of attacks in Iran for the ninth consecutive day on Monday in retaliation for US soldiers killed in Iranian attacks this weekend. Concerns of an all-out war, however, have been eased by Iranian Foreign Minister’s comments, suggesting that mediators keep working to resume peace talks.
The US Dollar, on the other hand, has opened the week on a weak footing, still weighed by the soft US inflation figures released last week. June's Consumer Price Index (CPI) and later Producer Price Index (PPI) numbers showed a larger-than-expected cooling on price pressures, dampening investors’ expectations of a Federal Reserve (Fed) rate hike in July,
In Australia, the central bank hit the pause button in June following three rate hikes earlier this year and hinted at a “wait-and-see” stance in the coming months to assess the economic impact of monetary tightening. The resumption of hostilities in Iran and the rebound in oil prices, however, are likely to add pressure on the bank to hike rates for a fourth time this year.
Against this background, it will be interesting to see how long interest rate expectations can keep the geopolitical uncertainty in the background to support the Aussie's near-term bullish trend. Australian Employment and business activity figures, due on Thursday, might help to answer that question.
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.
