Australian Dollar strengthens above 0.7000 despite rising US-Iran tensions
- AUD/USD gains ground to around 0.7010 in Tuesday’s Asian session.
- The US launches further strikes on Iran.
- The RBA is in a “wait-and-see" mode as it monitors key economic data ahead of its next policy meeting.
The AUD/USD pair drifts higher to near 0.7010 during the Asian trading hours on Tuesday. However, the potential upside for the pair might be limited amid the escalation of the US-Iran conflict. The Australian employment report will take center stage later on Thursday.
The US Central Command (CENTCOM) said on Monday that it completed more strikes against Iran, hours after US President Donald Trump warned that Tehran would pay for the deaths of three American soldiers over the past few days, per CNN.
Iranian state media reported explosions across southern Iran, including on Qeshm Island and in Bandar Abbas, Sirik, Chabahar, Isfahan and Konarak. Kuwait also said that its air defences were activated against Iranian missile and drone attacks. Ongoing tensions in the Middle East could weigh on riskier assets such as the Australian Dollar (AUD) against the US Dollar (USD) in the near term.
After delivering three consecutive 25 basis points (bps) hikes earlier this year, the Reserve Bank of Australia (RBA) decided to leave the Official Cash Rate (OCR) unchanged at 4.35% at its June policy meeting. The Australian central bank is currently in a "wait-and-see" mode to evaluate how its tightening cycle is impacting sticky core inflation and a cooling domestic economy.
The ASX 30-Day Interbank Cash Rate Futures implied a 16% chance of an RBA rate hike in August, with a roughly 50% to 60% possibility of one more hike by December 2026.
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.
