Australian Dollar gathers strength on RBA rate hike expectations, Hormuz tensions simmer

AUD/USD strengthens near 0.7215 in Monday’s early Asian session.
RBA is likely to raise the Official Cash Rate to 4.35% at the May meeting on Tuesday.
Trump said the US will start guiding trapped ships through Hormuz.

Lallalit Srijandorn FXStreet

AUD/USD gains traction to around 0.7215 during the early Asian session on Monday. The Australian Dollar (AUD) edges higher against the US Dollar (USD) as traders anticipate a rate hike from the Reserve Bank of Australia (RBA) on Tuesday.

There’s a nearly 80% probability that the RBA will deliver a third straight interest rate rise on Tuesday, according to Reuters. The primary driver is a significant jump in headline inflation in March, fueled by global energy shocks and Middle East tensions. Australian headline Consumer Price Index (CPI) inflation climbed to 4.6% YoY in March. While the figure was slightly below the 4.7% forecast, it remains well above the central bank’s target range.

However, rising tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the pair. US President Donald Trump said the US will begin guiding some neutral ships trapped in the Persian Gulf out through the Strait of Hormuz beginning Monday, per Bloomberg. Meanwhile, an Iranian official stated that any US interference in the new maritime regime of the Strait of Hormuz will be considered a violation of the ceasefire.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

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.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

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.

How does the health of the Chinese Economy impact the Australian Dollar?

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.

How does the price of Iron Ore impact the Australian Dollar?

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.

How does the Trade Balance impact the Australian Dollar?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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