AUD/USD fell for a second day, trading near 0.7020 in Asian hours on Wednesday, as markets waited for China’s May CPI and PPI readings and later turned to the US May CPI release. The US Dollar edged higher as risk aversion increased after renewed Middle East tensions, following a Reuters report that the US launched strikes against Iran after President Donald Trump said Tehran had shot down a US Apache helicopter in the Strait of Hormuz. Trump also said earlier on Tuesday that Iran and the US were close to an agreement, though progress has been limited since a ceasefire in early April.
Persistent uncertainty over a peace deal has kept inflation concerns elevated and reinforced expectations for higher interest rates, while stronger-than-expected US May jobs data have lifted the odds of a Federal Reserve rate hike this year. In Australia, consumer confidence weakened again, with the Westpac–Melbourne Institute Consumer Sentiment Index down about 3% to 80.6 in June, its fourth decline this year and among the weakest readings in decades. The RBA targets inflation of 2-3%, while iron ore—Australia’s biggest export—was valued at $118 billion a year in 2021.
Global and Domestic Headwinds for AUD/USD
We are seeing the AUD/USD pair under pressure, and this trend looks likely to continue in the weeks ahead. The combination of a risk-averse market, driven by Middle East tensions, and a stronger US dollar is creating significant headwinds. We will be closely watching upcoming US inflation data for any surprises that could strengthen the Federal Reserve’s resolve.
While strong US jobs data initially fueled expectations for rate hikes, the most recent US CPI data from May showed inflation cooling slightly to 3.3%. This has introduced some uncertainty, but the Fed’s overall hawkish stance remains the dominant market theme. We view this environment as supportive for the US dollar against commodity currencies like the Aussie.
China Slowdown and Iron Ore Concerns
The outlook from Australia’s key trading partner, China, is also a major concern for us. China’s recent official manufacturing PMI data for May came in at 49.5, indicating a contraction in factory activity. This directly weakens demand for Australian exports and puts a cap on any potential strength in the AUD.
This slowdown in China has a direct impact on iron ore, Australia’s most important export. We have seen iron ore prices fall to around $107 per tonne, a significant drop from levels above $130 seen earlier in the year. This continued price weakness erodes a fundamental pillar of the Australian dollar’s value.
Domestically, the picture in Australia is not encouraging, which reinforces our cautious stance. While the Reserve Bank of Australia is holding rates high at 4.35% to fight persistent inflation, Australian consumer sentiment is near historic lows. This tight domestic situation leaves the RBA with little room to maneuver and makes the AUD more vulnerable to global economic shifts.
Given these converging factors, we believe selling into any rallies of the AUD/USD is the most prudent strategy for the coming weeks. We will be using put options to protect against further downside and to position for potential volatility around key data releases.
