Oil prices surge, currency 'accidentally' becomes safe haven

# Zhao Ying

Source: Wallstreetcn

Amid global market turmoil, the Australian dollar has risen against the trend, climbing to 71.78 US cents – its highest level since June 2022 – and hitting its strongest level against the Japanese yen in 35 years. Bolstered by a rate-hike probability above 70% and its status as an energy exporter, it has become the strongest major currency this year. Citigroup expects it to break above 75 US cents within three months.

Amid volatile global markets, the Australian dollar is unexpectedly emerging as a safe-haven currency.

On Wednesday, AUD/USD rose to 71.78 US cents, the highest since June 2022, while hitting its strongest level against the yen in 35 years, making it the best-performing major currency this year. The rally is driven by elevated oil and gas prices and strong market expectations that the Reserve Bank of Australia could raise rates as soon as next week. Citigroup predicts the Australian dollar could rise to 75 US cents within three months.

This move defies the traditional pattern in which the Australian dollar usually weakens during periods of geopolitical tension.

Nick Twidale, Chief Market Analyst at AT Global Markets in Sydney, said:

“The Australian dollar is a better place to be than other currencies in the current environment,”

noting that this runs “contrary to the traditional direction we usually see in times of geopolitical stress – where the Aussie generally weakens across the board, particularly versus the yen.”

## Rate expectations support yield advantage

Rate expectations are a core driver supporting the Australian dollar.

Interest rate swap markets now price in a more than 70% probability that the RBA will raise rates at its March 17 meeting.

The RBA has previously adopted a hawkish tone, stating clearly that it would not hesitate to raise policy rates if the Iran conflict further exacerbates inflationary pressures.

This expectation has pushed Australian government bond yields to among the highest in developed markets.

The benchmark Australia-US yield spread widened on Tuesday to its widest level since October 2022, further enhancing the appeal of the Australian dollar.

According to options market data compiled by Bloomberg, as of early Wednesday, the probability of the Australian dollar reaching 75 US cents within three months was nearly 33%.

## Energy exporter status provides extra support

Beyond interest rates, Australia’s position as a major energy exporter has provided additional support amid high oil and gas prices.

Dirk Willer, strategist at Citigroup, wrote in a client note:

“Even during the most intense Iran-related market stress, there has been virtually no significant selling in AUD. Positive terms-of-trade effects and the central bank’s hawkish stance are providing mutual support.”

Citigroup believes that if oil prices stabilize at high levels rather than continuing to surge, combined with the RBA maintaining its hawkish tone, upward momentum for the Australian dollar could rebuild.

Analysts note that as long as energy prices remain elevated, the Australian dollar can continue to benefit from improved terms of trade, remaining relatively resilient amid broader market volatility.

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