- AUD/USD edges higher as the safe-haven demand of the US Dollar has diminished.
- The US is not expected to strike Iran immediately.
- The Australian laborforce witnessed a reduction in number of workers in May.
The AUD/USD pair ticks up to near 0.6490 during European trading hours on Friday. The Aussie pair oscillates inside the Thursday’s trading range, while investors await the decision from the United States (US) about whether it will directly involve in the week-long aerial war between Israel and Iran.
On late Thursday, the statement released by the White House indicated that the US has no intensions to strike Iran immediately. “Based on the fact that there is a substantial chance that negotiations may or may not take place with Iran in the near future, I will make my decision whether or not to go, within the next two weeks,” Press Secretary Karoline Leavitt cited the quote provided by President Donald Trump.
This has eased demand for safe-haven assets, such as the US Dollar (USD), which attracted bids on Thursday after a report from Bloomberg signaled that senior US officials are preparing for a possible attack on Iran as soon as the weekend.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects to near 98.60 from the weekly high of 99.15 posted on Thursday.
Meanwhile, the Australian Dollar (AUD) trades higher against its major peers, except European currencies, even though signs of softening labor demand have forced traders to raise Reserve Bank of Australia (RBA) dovish bets. The employment report showed on Thursday that the laborforce was reduced by 2.5K workers in May, while business owners were expected to have added fresh 25K workers. The Unemployment Rate remained steady at 4.1%, as expected.
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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