The Australian dollar, local bonds, and the ASX Composite are rising this month as the country becomes an unusual haven among investors.
The AUD/USD exchange rate jumped to its highest point since 2022, while the ten-year government bond yields dropped from this week’s high of 5% to the current 4.80%.
Similarly, the ASX 200 Index, which tracks the biggest Australian companies, rose to $8,750, up by 3.40% from the lowest point this year.
ASX 200 Index and AUD/USD | Source: TradingView
Why AUD/USD, Australian bonds, and ASX 200 Index are rising
Australian assets are doing relatively well this month as the crisis in the Middle East has accelerated, with no clarity on when it will end.
Donald Trump sent mixed signals this week, noting that the war goals were ahead of schedule and that he hoped that it would end soon.
He has also come under pressure from Republicans who believe that they will lose in the midterm elections the longer the war takes.
On the other hand, Iran has said that it was not in a hurry to end the war and has continued launching attacks in the region.
Meanwhile, energy prices have pulled back this week, with Brent and West Texas Intermediate falling from nearly $120 on Monday to below $90.
Australian assets have become safe havens because the country is relatively insulated from the ongoing war. For one, it does not import a lot of oil from the Middle East, with its top sources being Malaysia and the United States.
Australia also produces some oil and gas domestically. It produces about 400k barrels of oil per day and is one of the top players in the natural gas industry.
RBA to hike interest rates again
Meanwhile, the Australian dollar has jumped as analysts predict that the Reserve Bank of Australia (RBA) will hike interest rates when it meets this month.
Economists at National Australia Bank (NAB) and Westpac said that the bank will likely hike for the second consecutive meeting, bringing the benchmark rate to 4%. This view rose after Andrew Hauser, the deputy head of the RBA warned about the inflationary risk of the ongoing war. A NAB analyst said:
“Given the relatively unfavorable starting point for inflation in Australia and recent confirmation that the economy is running well above its trend rate of growth, the case for a near term rate hike is clear.”
The most recent data showed that Australia’s inflation has remained at an elevated level in the past few months. Data showed that the headline inflation rose 3.8% in January, remaining outside the RBA’S band of between 2% and 3%.
The closely-watched trimmed mean inflation rose 3.4%, while the weighted mean figure rose 3.6%. With the labor market remaining low, the bank has an incentive to hike rates again.
Mining and financial companies were among the top gainers in the ASX 200 Index. Newmont, a top player in the gold mining industry, rose by nearly 2% on Wednesday. Similarly, BHP Group, ANZ Bank, Macquarie, Commonwealth Bank, NAB, and Westpac jumped by over 1%.
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