Australian Dollar softens to near 0.7000 as Vice President canceled trip to talks with Iran

AUD/USD weakens to around 0.7010 in Friday’s Asian session.
US Vice President cancels trip to Switzerland for Iran talks.
Fed's hawkish hold leads to rate-hike bets, supporting the US Dollar.

Lallalit Srijandorn FXStreet

The AUD/USD pair loses momentum to near 0.7010 during the Asian trading hours on Friday. The Australian Dollar (AUD) softens against the US Dollar (USD) after reports that US Vice President JD Vance canceled his trip to talks with Iran in Switzerland, raising concerns about the US-Iran peace deal.

CNN reported on Friday that the White House indicated that the first round of technical talks with Iran under the memorandum of understanding signed this week will not take place on Friday. Vance said that the meeting wasn’t yet finalized, as it’s difficult for the Iranian officials to get out of Iran. Vice President added that he thought he would travel to Switzerland at some point this weekend.

Traders will closely monitor the developments surrounding the peace agreement. A lack of progress in US-Iran or any signs of renewed tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.

Furthermore, the hawkish stance of the US Federal Reserve (Fed) might contribute to the USD’s upside. The US central bank on Wednesday decided to hold the interest rates steady in a 3.50% to 3.75% range as Kevin Warsh began his era in charge with a sweeping policy review. Fed officials signaled the chance of higher rates as they assess the impacts of the Iran war on inflation.

"We've seen very spectacular data in the U.S. that's been surprising to the upside since late April, then the Fed was as hawkish as market expectations could ever have been, so we've seen more dollar upside," said Sarah Ying, head of FX strategy at CIBC Capital Markets.

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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