Under multiple shocks, the Australian dollar unexpectedly shows resilience against declines

Recently, the Australian dollar performed better than expected, mainly due to disruptions in Middle Eastern energy supplies, with Asian countries beginning to turn to Australia for natural gas and coal alternatives, boosting related commodity prices. At the same time, the Australian dollar also received support from the Reserve Bank of Australia. In the long term, the AUD may continue its upward trend.

In the face of repeated geopolitical tensions, energy supply disruptions, and volatile market sentiment, the AUD, often regarded as the “global risk barometer,” should weaken under this wave of shocks, yet it has recently outperformed expectations.

Analysts say that considering the stakes in Middle Eastern affairs this week and a series of possible outcomes, the AUD might lead market movements.

This week, the AUD started strong, rebounding against the US dollar and regaining the key 0.6900 level. On Tuesday, the AUD maintained an optimistic trend, pushing the AUD/USD exchange rate to a four-day high near 0.6950, also opening the door for a potential short-term push above the psychological 0.7000 level again.

Limited Decline Amidst Warfare

Due to its high liquidity and positive correlation with commodity prices, the AUD is often seen as a risk currency reflecting market sentiment.

Geopolitical tensions usually increase demand for safe-haven currencies like the US dollar, which can limit the AUD’s gains or even cause it to decline.

At the end of February, conflicts erupted between the US, Israel, and Iran. In the past, such events might have triggered a sell-off of the AUD—for example, during similar incidents in 2019, the AUD/USD rate experienced a brief and sharp sell-off before rebounding.

However, in this shock, the AUD/USD only fell by less than 3%, remaining around 0.69, and the decline against a basket of major trading partner currencies was only about 2%. Considering Iran’s de facto blockade of the Strait of Hormuz, this performance appears relatively resilient.

Ray Attrill, head of FX strategy at National Australia Bank (NAB), pointed out that maintaining stability amid such a geopolitical shock demonstrates considerable resilience for the AUD.

Two Major Factors Support Resilience

The reason the AUD has not weakened significantly like typical risk assets, but instead shows resilience, is mainly due to disruptions in Middle Eastern energy supplies and Asian countries turning to Australia for natural gas and coal, boosting related commodity prices.

Although the closure of the Strait of Hormuz has pushed oil prices above $100 per barrel and raised concerns about economic slowdown, Australia’s position as a major exporter of natural gas and coal keeps the AUD firm.

Lachlan Dynan, a macro strategist at Deutsche Bank, noted that the AUD’s resilience is reflected in the new highs during the ongoing conflict.

On March 11, the AUD reached a four-year high of 71.51 cents, though it later retreated to about 69.11 cents, still up nearly 4% since the start of the year.

“The main driver is its status as an energy exporter,” Dynan said. “They sell the commodities that Asia currently needs… Demand may shift from the Middle East to Australia.”

This shift is not limited to natural gas. As countries are forced to restart coal-fired power plants to avoid oil shocks, Newcastle coal prices have risen about 20% since the outbreak of war.

Dynan added, “The AUD is protected on the downside… If the conflict escalates further, Australia’s energy exposure will provide a buffer for the AUD.”

This reconfiguration of supply and demand means the AUD’s movement is no longer entirely dictated by global risk appetite fluctuations but is supported by fundamentals. Even if market sentiment weakens temporarily, the trade surplus from energy exports and capital inflow expectations provide a floor, making it harder for the AUD to depreciate persistently compared to other risk currencies.

In addition to commodity support, interest rate factors are also significant.

Beyond commodities, the AUD has also been supported by the Reserve Bank of Australia. It is the only G10 central bank to have raised interest rates during the Iran conflict.

To curb inflation rebound, the RBA has already raised the cash rate twice this year to 4.1%, with markets expecting at least two more hikes by year-end.

These measures have made Australia’s cash rate the highest among G10 countries for the first time in years, attracting investors seeking higher returns.

Dynan stated that this interest rate advantage “is very supportive,” helping the AUD remain relatively stable amid market turbulence.

Short-term Downside Risks

Given the stakes in the Middle East this week and the potential outcomes, the AUD might lead market movements.

Ahead of the previous deadline set by Trump, cautious market sentiment increased, causing the US dollar to lose some support. On Monday (the 6th), after two days of decline, the AUD/USD broke above 0.6900.

In the long term, the AUD may continue its upward trend.

Deutsche Bank believes the AUD is a resilient “asymmetric” bet; its status as an energy exporter shields it from further escalation in the Middle East, while resolution of the conflict could trigger a sharp rally in the AUD.

Dynan expects the AUD to reach 71 cents before Christmas, “the AUD could be one of the best currency trading options because of its very strong arbitrage effects.”

Attrill also believes that if the conflict is resolved and oil prices fall, the AUD/USD exchange rate will rebound above 0.70. He also expects the AUD to reach 0.73 by year-end.

A survey of 36 economists by the Australian Financial Review shows the AUD/USD will reach 0.72 by the end of the year.

Latest reports indicate that the US and Iran have agreed to a two-week ceasefire and will hold negotiations in Islamabad on April 10.

However, this outlook is not without risks.

Richard Franulovich, head of FX strategy at Westpac, warned that the AUD is essentially betting on two very different possible outcomes of the war.

“The AUD is balancing between two binary scenarios,” Franulovich said. “If the conflict escalates further—for example, with ground troops involved or the strait permanently closed—the AUD/USD could fall to just above 0.60.”

But if peace is achieved, a strong relief rally could occur, potentially pushing the AUD/USD back to around 0.75 before Christmas.

However, with market positioning already tight and seasonal factors suggesting increased volatility, the AUD/USD might face short-term downside risks before any sustained upward breakout.

Market analyst Matt Simpson believes that the AUD’s strength in the first quarter was mainly driven by the Reserve Bank of Australia’s rate hikes, which increased domestic interest rates and widened the interest rate differential with the Federal Reserve, attracting capital inflows into Australian assets.

But entering the second quarter, this support mechanism began to weaken. On one hand, Middle Eastern geopolitical risks pushed energy prices higher, increasing inflation uncertainty and putting pressure on global economic growth; on the other hand, market expectations for future policy paths of the RBA and Fed have become volatile.

Against this backdrop, although the interest rate differential still provides some support for the AUD, slowing growth and declining risk appetite are exerting downward pressure, leading to a lack of clear direction in the AUD/USD exchange rate amid mixed bullish and bearish factors, with increased short-term volatility likely unless new macro or policy signals emerge.