AUD/USD trades higher amid USD strength, commodities maintain gains

• The AUD/USD pair is trading slightly higher against the USD on easing tensions in the Middle East.
• The rise in raw material prices, especially metals exported by Australia, also serves as support.
• Australian CPI data for the first quarter and US PCE inflation data will likely be the main drivers of the week.

The AUD/USD pair is trading higher at 0.6430 at the start of the week as tensions in the Middle East ease and commodities hold their value.

The Australian Dollar (AUD) tends to decline during periods of uncertainty, unlike the US Dollar (USD), which has safe haven qualities, so the dissipation of geopolitical risk helps the AUD more than the USD.

Israel's counterattack against Iran on Friday caused a sudden spike in the fear index and, as a consequence, a new April low in the AUD/USD pair, which stood at 0.6362. The Israelis fired a warning shot at a nuclear facility near Isfahan. The attack could have triggered a thermonuclear explosion, but it ultimately did not, and Iran has not retaliated. As a consequence, the markets have returned to calm this Monday, which has led to a new rise in the Australian dollar.

US Dollar Strengthens Against Most Peers

The US Dollar remains strong across most pairs despite falling safe haven flows. This is because markets expect this week's US data to show continued economic growth.

“Preliminary US PMIs for April (Tuesday), first quarter GDP (Thursday) and March personal income and spending report (Friday) are expected to support US economic exceptionalism,” Brown Brothers Herriman says in a published note. on Monday, adding: “Overall, as long as US economic activity remains strong, the USD's cyclical uptrend is intact.”

The most important release will be US personal consumption expenditure (PCE) data for March, including the Federal Reserve's (Fed) preferred inflation gauge, the personal consumption expenditure price index.

If the inflation of PCE in the United States (US) rises higher than expected, will boost USD/JPY, suggesting an even longer delay before the Fed cuts interest rates. If interest rates remain high for longer, demand for USD from foreign investors looking to park their capital will increase.

Australian exceptionalism

The AUD/USD pair is performing better than most USD pairs, partly because commodities, of which Australia is a major exporter, are holding their value better than expected.

“The current decline in global commodity prices is helping to protect the Australian dollar somewhat on the crosses. The LME base metals index rose 5.3% last week, bringing its gains so far in April are 14%,” says Richard Franulovich, Head of Foreign Exchange Strategy at Westpac.

However, the support effect may not last as iron ore, which is Australia's largest export, may be peaking and about to tip over.

“Iron ore markets showed some signs of peaking after April's sharp rise. The SGX May contract is up $1.15 since the same time on Friday, to $115.90, while the Mysteel index is up 62%. is down 35 cents to $116.90,” says Westpac.

Chile has raised tariffs on Chinese steel, and in the US, President Biden is calling for higher tariffs to prevent Chinese steel from flooding the market and pricing out the competition. Australia is a major supplier of iron ore to China for its steel production, so a trade war or higher tariffs could affect Australian exports and the Australian dollar.

“In a sign that near-record Chinese steel exports are putting pressure on steel producers around the world, Chile imposed anti-dumping tariffs on Chinese steel products with a 33.5% import tax on steel balls and 24.9% on steel bars. The measure comes after US President Biden last week asked the USTR to triple the tariff on Chinese steel,” adds Westpac.

Australia to publish inflation data

The most important release for the Australian Dollar this week is the Consumer Price Index (CPI) for the first quarter of 2024, which will be released on Wednesday, April 24.

Analysts expect the first-quarter CPI to rise 0.8%, up from 0.6% in the fourth quarter, although base effects will see the annual pace slow to 3.4%, from 4.1%.

“Westpac's forecast for the trimmed average is 0.8% for the quarter, which would take the annual pace from 4.2% to 3.8%, the slowest since March 2022,” says Richard Franulovich.

The Reserve Bank of Australia (RBA) is not expected to cut rates before the Federal Reserve (Fed), providing another supportive factor for AUD/USD. Relatively high interest rates are supportive of currencies as they encourage more capital inflows. Although the RBA has set base interest rates at 4.35% versus the Fed's 5.25%-5.50%, which favors the US dollar overall, whether the spread widens or closes is a key factor for the valuation of the AUD/USD.

Current market expectations are for the RBA to cut interest rates in December, following the Fed's cuts in September/November, according to Westpac's Franulovich. This is supporting AUD/USD as the spread is expected to narrow.

However, Wednesday's Australian CPI data could be key here, as “a softer-than-consensus Q1 CPI could galvanize the possibility of RBA rate cuts ahead of the Fed,” he says. the Westpac analyst, which would translate into a further fall in AUD/USD.