Australian Dollar rises as improving sentiment outweighs decreasing RBA rate hike odds
- AUD/USD rises as the Australian Dollar gains support from fading safe-haven demand ahead of a US-Iran accord.
- Weakened RBA rate hike expectations may cause the Australian Dollar to face upcoming challenges against the US Dollar.
- Dollar strength could revive as persistent inflationary pressures in the US push expectations away from Fed rate cuts.
AUD/USD holds ground after two days of losses, trading around 0.7170 during the early European hours on Monday. The pair appreciates as the Australian Dollar (AUD) receives support from fading safe-haven demand in anticipation of the United States (US)-Iran accord. Current reports suggest that the two nations are nearing an agreement centered on a 60-day ceasefire extension.
As part of a potential US-Iran peace deal, the Strait of Hormuz would reopen, Iran would clear the mines it deployed in the waterway and permit free shipping passage, and the United States would respond by lifting its current blockade on Iranian ports.
However, the Australian Dollar may face upcoming challenges against the US Dollar as expectations for further monetary tightening by the Reserve Bank of Australia (RBA) have weakened. This shift in sentiment follows a surprise rise in the nation's jobless rate, which has dampened forecasts for future interest rate hikes.
According to recent data, Australia’s unemployment rate unexpectedly climbed to 4.5% in April, up from 4.3% in March. This spike marks the highest jobless level the country has seen in about four and a half years.
In response to the economic data, financial markets quickly adjusted their expectations. Westpac pricing indicates that the probability of a rate hike at the RBA's next meeting plummeted to just 3%, down from 13% prior to the release.
The decline of the Greenback may be limited by persistent inflationary pressures in the United States, which have caused investors to recalibrate their Federal Reserve expectations away from rate cuts and toward potential future rate hikes. According to the CME FedWatch tool, market participants are now pricing in a nearly 41.0% probability that the Fed will implement a 25-basis-point interest rate increase by the end of the year.
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.
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Past performance is not a reliable indicator of future performance and/or results. Forward-looking scenarios or forecasts are not a guarantee of future performance. Actual results may differ materially from those anticipated.
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