This pretty aggressive turn of policy has actually anchored the Aussie well above that critical 0.7000 level even as safe haven demand for USD persists because of the ongoing conflict in the Middle East.
RBA Hawkishness and the Middle East Energy Boom
The main driver behind the RBA’s decision to hike interest rates two months in a row is basically the worst-case scenario for the economy given a massive energy price shock combined with a super tight domestic labor market.
Governor Michele Bullock highlighted that while the global inflation has started to come down from its peak in 2022, it’s actually picked up significantly in the second half of 2025, with recent hostilities in the Middle East causing petrol prices in Australia to shoot up above $2.20 per liter.
The board is still pretty concerned that the Australian economy is running at a pace that’s way beyond what can be sustained. The growth in the latter part of 2025 far exceeded all the forecasts, and that’s creating a rather interesting divergence between the RBA and the Federal Reserve – markets are now pricing in a potential move all the way up to 4.35% by the end of the year – that’s in contrast to the Fed which is grappling with cooling labor data.
China’s Economic Resilience and Commodity Tailwinds
Helping the Aussie along are actually pretty strong economic indicators coming out of China, Australia’s largest trading partner. Just recently we’ve seen that China’s Retail Sales rose 2.8% y/y in February, beating all the forecasts, while Industrial Production surged 6.3% y/y, way outperforming expectations.
This resilience in the resources sector is basically what’s stabilizing demand for iron ore and LNG from Australia – providing a solid fundamental floor for the currency even when the world is feeling pretty risk averse.
