The AUD/USD pair dropped to 0.5985, marking its lowest point in five years, largely due to China’s decision to impose a 34% tax on US imports. This measure is a direct response to US tariffs and has heightened trade tension concerns between the two nations.
Recent data from the US Labor Department showed that March Nonfarm Payrolls rose by 228,000, up from 117,000 in February, while the unemployment rate increased to 4.2%. This employment report may delay interest rate cuts from the Federal Reserve, which is still anticipated by the market by year-end.
Factors Influencing The Australian Dollar
The Australian Dollar is influenced by several factors including interest rates set by the Reserve Bank of Australia (RBA) and the price of Iron Ore, Australia’s largest export. The health of the Chinese economy also plays a pivotal role, as strong performance leads to increased demand for Australian exports, boosting the AUD.
Iron Ore prices directly affect the Australian Dollar’s value. When these prices rise, the AUD typically strengthens due to heightened demand, while a decline in Iron Ore prices has the opposite effect. Additionally, a positive trade balance also supports the Australian Dollar, as it indicates strong export performance compared to imports.
With the AUD/USD breaching the 0.6000 level and dipping to its lowest point since 2019, the market is clearly reacting not just to immediate headlines but also to broader macro themes that are gaining pace. The newly announced 34% tariff from Beijing on US imports is more than a retaliatory gesture; it signals a prolonged period of defensive trade policies that could undermine growth expectations across the Asia-Pacific region. For Australia, whose economy is closely intertwined with regional demand—particularly from Asia—this development is likely to reinforce downside pressure on its currency.
The reaction in the Aussie was swift and acute. While the move was initially triggered by renewed tension between two global powers, risk sentiment also deteriorated further as commodity traders, especially those exposed to iron ore, recalibrated for declining Chinese industrial demand. Given that iron ore is Australia’s top export, any suggestion of slower infrastructure spending or manufacturing output from China typically finds its way into forex pricing mechanisms within hours, if not minutes—even if the changes have not yet materialised in physical shipments. For now, the pricing is forward-looking and registering a more cautious tone.
Developments In US And Australian Markets
From the US side, the latest jobs data delivered a mixed picture. Payroll growth accelerated in March, indicating that employers are still adding headcount. Yet, the uptick in the headline jobless rate to 4.2% gives the Federal Reserve room to argue against imminent rate adjustments. While markets are still assigning some probability to rate reductions into year-end, we now see less urgency in the Fed’s tone, which has historically kept rate differentials between the US and Australia wide. This continues to act as a persistent headwind for the AUD, especially when yields on US assets remain elevated.
Looking more granularly, the Reserve Bank of Australia has shown no inclination to move aggressively on rates in either direction. With inflation still in the system and global uncertainty weighing on economic outlooks, the RBA appears content with a cautious approach. That offers limited support for the local currency unless accompanied by sustained commodity resilience. However, with iron ore prices showing signs of stress, largely due to softening steel demand forecasts from Chinese state planners, there is little on the immediate horizon to inspire bullish positions.
In the short term, we anticipate that traders in derivatives tied to AUD pairs—or even those indirectly impacted through commodity proxies—should prepare for a period defined by headline volatility. Hedging exposure, both intraday and across settlement windows, becomes key. We are paying particular attention to changes in net short positioning on the Australian Dollar in the futures markets, which are already showing signs of re-leveraging.
Spread pricing between Australian and US interest rate futures should also be watched closely. Any re-pricing in expectations due to wage or inflation data from either country could materially affect forward-looking yields, and by extension, foreign exchange valuations. We find that reaction functions in the swap market are currently more sensitive to external developments than to domestic Australian data, reflecting how much sentiment has shifted offshore.
As base metals face resistance and trade headwinds persist, it’s worth monitoring how freight and shipping costs evolve. They’ve recently shown sensitivity to geopolitical risk, particularly in Asia-Pacific routes. Since Australia mints a trade surplus driven by raw materials, any disruptions or rising costs in transporting goods can reduce expected revenue inflow, weighing further on currency momentum.
Ultimately, while the directional trade in AUD/USD has been clear, the pathway may become less linear. We remain cautious about implied volatility readings, which have yet to fully reflect downside event risks. Traders should factor in both scheduled data and irregular policy pronouncements—these could disrupt positioning, particularly for those exposed through leveraged instruments or tight stop-loss thresholds.
