AUD/USD fell for a second day, trading near 0.7160 in Asian hours on Tuesday. Markets expected the Reserve Bank of Australia to raise rates later in the day, with ASX 30 Day Interbank Cash Rate Futures for May 2026 at 95.745 on 1 May, implying a 74% chance of a move to 4.35%.
The pair weakened as the US dollar strengthened on safe-haven demand after Iran attacked the United Arab Emirates. CNBC reported the UAE was targeted by Iranian drones and missiles, while the US said it destroyed Iranian boats in the Strait of Hormuz.
Geopolitical Risk And Safe Haven Flows
US President Donald Trump said Iran would be “blown off the face of the earth” if it targets US ships protecting commercial vessels in the Strait. Iran’s Foreign Minister Abbas Araghchi said the situation shows “clearly that there is no military solution to a political crisis,” and wrote on X, “Project Freedom is Project Deadlock.”
Minneapolis Fed President Neel Kashkari said additional US rate rises cannot be ruled out. He cited inflation risks linked to higher energy prices connected to the Iran conflict.
The Aussie dollar is caught between our own Reserve Bank’s expected rate hike and a surging US dollar. The safe-haven demand stemming from the Iran conflict is currently the dominant force, pushing the pair down despite a 74% probability of a rate increase to 4.35%. This fundamental conflict suggests volatility will be the main theme for the coming weeks.
We must focus on the Strait of Hormuz, as any disruption there directly threatens global energy supply and drives up oil prices. Historically, even minor incidents in the strait have caused significant price jumps; for instance, we saw Brent crude spike over 4% in a single day during similar tensions back in mid-2019. This scenario supports the US dollar as it fuels global inflation fears and reinforces the Federal Reserve’s hawkish stance.
Given the high degree of uncertainty, we should prepare for sharp price swings across asset classes, not just in currencies. The CBOE Volatility Index (VIX), which we saw jump above the 30-point mark during the onset of the Ukraine conflict a few years ago in 2022, is a key indicator to watch for signs of market stress. Derivative strategies that can profit from rising volatility, such as buying straddles on the AUD/USD, should be considered.
Managing Risk In A Volatile Macro Backdrop
We should remember that the AUD is a risk-sensitive currency that typically weakens during global turmoil. Despite our strong commodity exports, the initial flight to the safety of the US dollar often dominates market flows, as we observed during the market panic in early 2020. Therefore, buying put options on the AUD/USD could serve as an effective hedge against a further escalation of the Middle East conflict.
