AUD/USD rose for a second day, trading near 0.7220 in Asian hours on Wednesday. Markets are watching the US ADP Employment Change report due later the same day.
Australia’s AiG Industry Index improved to -24.4 in April from a revised -34.1 in March. The Ai Group Manufacturing index was flat, at -27.9 in April.
Australian Activity Indicators Still Weak
Australia’s Ai Group construction index climbed to -19.3 in April 2026, though it remained in contraction. Firms reported steady underlying demand.
In geopolitics, US Defense Secretary Pete Hegseth said on Tuesday that a ceasefire with Iran had not fully ended. The United Arab Emirates said it intercepted nearly all of about 20 missiles and drones launched from Iran the previous day, during exchanges in the Gulf linked to tensions over the Strait of Hormuz.
The current strength in the AUD/USD around 0.7220 seems fragile, given the Australian economic data is still deeply in contraction despite small improvements. With tensions escalating in the Gulf, we are looking at a classic risk-off scenario which typically strengthens the US Dollar. The market appears to be underpricing the geopolitical risk from the Strait of Hormuz.
This situation in the Gulf directly impacts oil, a key factor for global inflation and risk sentiment. Last year, in 2025, we saw a similar flare-up cause Brent crude to spike over 15% in a single week, a move that heavily punished risk-sensitive currencies like the Aussie dollar. A sustained conflict could easily push oil back towards $100 a barrel, creating significant headwinds for the AUD.
Volatility Positioning In Focus
Given the uncertainty, trading volatility itself is a primary strategy for the coming weeks. The CBOE’s Australian Dollar Volatility Index (Aussie VIX) has already ticked up to a three-month high of 11.5, suggesting the market is bracing for a larger-than-usual move. Buying straddles or strangles allows a trader to profit whether the pair breaks sharply up on a weak US jobs report or down on escalating conflict.
The balance of risks, however, appears skewed to the downside for the AUD/USD pair. Australian inflation remains a problem, with the Q1 2026 CPI print coming in at 3.8%, which is still well above the RBA’s target band and weighs on the domestic economy. Buying put options could serve as a cheap way to position for a potential decline back towards the 0.7000 level.
The upcoming US ADP employment report is the immediate catalyst that could decide the pair’s direction. Throughout 2025, we saw the US labor market gradually cool, but the last two major data prints have surprised to the upside, showing unexpected resilience. Another strong jobs number from the US would likely overwhelm the AUD’s minor positive data points and reassert the US dollar’s strength.
