The AUD/USD pair extends the decline to near 0.6885 during the early Asian session on Monday. The US Dollar (USD) strengthens against the Australian Dollar (AUD) amid stronger-than-expected US employment data and ongoing geopolitical tensions in the Middle East. The US March ISM Services Purchasing Managers Index (PMI) data will be the highlight later on Monday.
Data released by the US Bureau of Labor Statistics (BLS) on Friday showed that the US Nonfarm Payrolls (NFP) rose by 178K in March. This figure followed a 133K decline (revised from -92K) and came in well above market expectations for a 60K gain. The Unemployment Rate ticked lower to 4.3% in March from 4.4% in February.
US President Trump on Sunday escalated his threats to bomb Iranian power plants starting Tuesday and bring “Hell” to the country after US forces rescued an airman from Iran more than a day after his fighter jet was shot down.
Escalating tensions between the US and Iran and concerns over the Strait of Hormuz closure continue to boost a safe-haven currency such as the Greenback and create a headwind for the pair in the near term.
Market expectations for the May meeting lean toward another potential rate hike due to rising oil prices and a tight labor market. Westpac analysts expect the Reserve Bank of Australia (RBA) to deliver three further rate hikes in 2026. This would take the cash rate to 4.85%, a level not seen since November 2008.
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.
