AUD/USD trading higher despite USD strength as commodities hold value

AUD/USD is trading higher in the 0.6430s at the start of the week as Middle East tensions ease and commodities hold their value. 

The Australian Dollar (AUD) tends to decline during periods of uncertainty, unlike the US Dollar (USD) which has safe-haven qualities, so the unwinding of geopolitical risk helps AUD more than USD.

Israel’s counter-attack against Iran led to a sudden spike in the fear index on Friday and a resulting new low for April in AUD/USD at 0.6362. The Israelis fired a warning shot at a nuclear facility near Isfahan. The strike could have set off a thermonuclear explosion but in the end didn’t, and Iran has not retaliated. As a result, markets have settled back down on Monday, leading to renewed upside for the Aussie. 

US Dollar stronger in most pairs 

The US Dollar remains strong in most pairs despite the fall in safe-haven flows. This is due to the fact that markets expect data out of the United States this week to show continued economic growth. 

“The US preliminary April PMIs (Tuesday), Q1 GDP (Thursday) and March Personal Income and Outlays report (Friday) are expected to back American economic exceptionalism,” says Brown Brothers Herriman in a note on Monday, adding, “Overall, as long as US economic activity remains solid, the cyclical USD uptrend is intact.”

The most important release will be Friday’s US Personal Consumption Expenditure (PCE) data for March, including the Federal Reserve’s (Fed) preferred gauge of inflation, the Personal Consumption Expenditure – Price Index. 

If PCE inflation in the United States (US) registers a higher-than-expected rise it will boost USD/JPY, by suggesting an even longer delay before the Fed reduces interest rates. If interest rates remain higher for longer it increases demand for USD from foreign investors looking to park their capital. 

Australian exceptionalism

AUD/USD is fairing better than most USD pairs partly because commodities, which Australia is a major exporter of, are holding their value better than expected. 

“The ongoing squeeze in global commodity prices are helping shield the Aussie somewhat on crosses. The LME’s base metals index rose 5.3% last week taking its gains so far in April to 14%,” says Richard Franulovich, Head of FX Strategy, at Westpac. 

The supportive effect may not last, however, since Iron Ore, which is Australia’s largest export, could be peaking and about to roll over. 

“Iron ore markets showed some signs of peaking after the sharp ru up through April. The May SGX contract is up $1.15 from the same time Friday at $115.90 while the 62% Mysteel index is down 35c at $116.90,” says Westpac. 

Chile has increased tariffs on Chinese steel and in the US President Biden is calling for higher tariffs to prevent Chinese steel from flooding the market and pricing out the competition. Australia is a major supplier of Iron Ore to China for its steel production so a trade war or higher tariffs could hit Australian exports, and the Aussie Dollar. 

“In a sign that close to record Chinese steel exports is pressuring steel producers around the world, Chile slapped anti-dumping tariffs on Chinese steel products with a 33.5% import tax on steel balls and 24.9% on steel bars. The move follows US President Biden last week calling on the USTR to triple the tariff on Chinese steel,” adds Westpac. 

Australia to publish Inflation data 

The major release for AUD in the week ahead is Australian Consumer price Index (CPI) data for the first quarter of 2024, out on Wednesday, April 24. 

Analysts expect Q1 CPI to rise 0.8%, compared to 0.6% in Q4, though base effects will see the annual pace easing to 3.4%, from 4.1%. 

“Westpac’s forecast for the trimmed mean is 0.8% for the quarter, taking the annual pace from 4.2% YoY to 3.8% YoY, the slowest since March 2022, says Richard Franulovich. 

The Reserve Bank of Australia (RBA) is not expected to cut rates before the Federal Reserve (Fed) which is another supportive factor for the AUD/USD. Relatively higher interest rates support currencies since they encourage more capital inflows. Whilst the RBA has set base interest rates at 4.35% against the Fed’s 5.25%-5.50%, favoring the US Dollar overall, whether or not the differential widens or closes is a key factor for AUD/USD’s valuation. 

Current market expectations are for the RBA to cut interest rates in December after the Fed cuts in September/November, according to Westpac’s Franulovich. This is supporting AUD/USD since the differential is expected to narrow. 

However, Wednesday’s Aussie CPI data could be key in this regard since, “A softer than consensus Q1 CPI could galvanize the potential for RBA rate cuts before the Fed,” says the Westpac analyst, which would translate into further downside for the AUD/USD.