AUD/USD picks up to 0.7150 despite rising tesions in the Middle East

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The Australian Dollar (AUD) recovers previous losses against the US Dollar (USD) on Monday, amid tensions in the Strait of Hormuz between Iran and the US that cast doubt on the ceasefire's fate.

AUD/USD returns to the 0.7150 area after bouncing from lows near 0.7130.
Investors remain hopeful of a resolution of the US-Iran war despite the rising tensions.
Fed Chair-designate Kevin Warsh will testify at the Confirmation Hearing on Tuesday.

The Australian Dollar (AUD) recovers previous losses against the US Dollar (USD) on Monday, amid tensions in the Strait of Hormuz between Iran and the US that cast doubt on the ceasefire's fate. The pair is trading near the 0.7150 area at the time of writing, after bouncing at 0.7132 lows during the early Asian session.

The pair, however, remains below the 0.7200 range seen late last week, as investors grow wary of risk with the US and Iran exchanging threats ahead of the resumption of the second round of peace talks, originally scheduled for Tuesday in Pakistan.

The US military sparked tensions on Sunday after seizing an Iranian Cargo ship that attempted to close the Strait of Hormuz. Iran has vowed retaliation and has left its participation in the peace talks in the air. Iranian authorities suggested that they might not send a delegation to Pakistan to the local media, due to US violations of the ceasefire, which ends on Wednesday.

Against this background, the safe-haven US Dollar has been trimming some losses against its main peers earlier in the day, yet with upside attempts limited. Investors are clinging to hopes of a resolution of the conflict, which keeps the trisk-sensitive Aussie relatively close to recent highs.

Technical analysts at UOB Bank see the risks skewed to the upside for the AUD/USD, while support at the 0.7085 remains in place: "Upward momentum has slowed somewhat, but as long as 0.7085 is not breached, there remains a chance for AUD to close above 0.7190."

The calendar is thin on Monday, and news from the Middle East is highly likely to drive markets. On Tuesday, the US Retail Sales and the testimony of the Fed Chair-designate, Kevin Warsh, at the Senate will provide some diversion for traders. In Australia, the highlight of the week will be April’s preliminary Purchasing Managers’ Index (PMI) data, due in the early Asian session on Thursday.

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.