Australian Dollar softens as Middle East tensions, stronger jobs report boost US Dollar
- AUD/USD weakens to around 0.7035 in Monday’s early Asian session.
- Iran fired missiles towards Israel for the first time since the April ceasefire, raising fears of a prolonged Middle East conflict.
- RBA’s hawkish tone might cap the downside for the Australian Dollar.
The AUD/USD pair remains under selling pressure near 0.7035 during the early Asian session on Monday. The Australian Dollar (AUD) extends the decline against the US Dollar (USD) amid escalating tensions in the Middle East and stronger-than-expected US economic data.
Iran has fired multiple waves of missiles at northern Israel over the weekend. Iranian officials said that any attack from Israel against Lebanon or Iran would be met with a "crushing and comprehensive response.”
Meanwhile, US President Donald Trump said that he would call Israeli Prime Minister Benjamin Netanyahu and ask him not to retaliate because he was worried the attacks would "blow up" a deal between the three sides. Rising tensions in the Middle East and a fragile peace deal between the US and Iran could boost a safe-haven currency such as the Greenback and act as a headwind for the pair.
Furthermore, the US economy posted a third straight month of strong job gains in May, the Bureau of Labor Statistics reported Friday. US Nonfarm Payrolls (NFP) increased by 172,000 jobs in May, compared to 179,000 (revised from 115,000) in the previous reading, and the Unemployment Rate held at 4.3% during the same period. The upbeat jobs report contributes to the USD’s upside.
On the other hand, a hawkish tone from the Reserve Bank of Australia (RBA) might help limit the Aussie’s losses. RBA Governor Michele Bullock emphasized that the central bank remains strictly focused on curbing inflation, following three interest rate hikes earlier this year that pushed the cash rate to 4.35%.
Bullock added that inflation is too high, and the board will do what it considers necessary to achieve our mandate to deliver price stability and full employment.
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.