Key Highlights

  • Australian dollar surged above US70.7c, a three-week high, following Trump's announcement of ceasefire with Iran
  • A 10-point Iranian proposal received by the US opens a pathway toward a broader diplomatic settlement
  • Ceasefire complicates RBA tightening outlook, with markets previously pricing a rate hike at the May meeting
  • Analysts caution that energy supply normalisation could take months even under a durable agreement

 

The Australian dollar surged on Wednesday, breaking above US70.7c to its highest level in three weeks as easing geopolitical tensions lifted global risk appetite and weighed on the US dollar. The rally followed President Donald Trump’s announcement of a two-week ceasefire with Iran, a last-minute move that reduced the threat of renewed strikes on critical energy infrastructure.

Since the US-Israeli military campaign against Iran began in late February, the Australian dollar had declined less than 3 per cent against the US dollar, settling near US69c before Wednesday's rally. Against a trade-weighted basket, the decline over the conflict period had been just 2 per cent, reflecting structural support that most G10 peers could not replicate.

Energy Export Premium Remains Intact, for Now

The currency's resilience through the conflict period rested on Australia's role as a major exporter of liquefied natural gas and coal. As the Strait of Hormuz disruption redirected Asian energy procurement away from Gulf suppliers, Australian exporters absorbed a significant share of that incremental demand. Newcastle coal prices rose approximately 20 per cent from conflict outbreak levels. LNG demand from Northeast Asian buyers strengthened materially.

The ceasefire introduces a near-term question over the pace of demand redirection unwinding. However, analysts at Deutsche Bank have noted that structural supply chain reassessment by importing nations tends to persist beyond any immediate diplomatic resolution. Importers burned by a single supply concentration event rarely revert fully to prior sourcing patterns.

Analysts have also warned that even under a durable peace agreement, supply conditions could take months to fully normalise. Pipeline logistics, shipping rerouting, and long-term contract renegotiations operate on timelines that extend well beyond a two-week ceasefire window. That lag provides Australian export demand with near-term insulation even as the geopolitical risk premium partially unwinds.

Australia remains one of only three sovereigns globally to hold both an AAA credit rating and net energy exporter status, alongside Canada and Norway, reinforcing the structural demand argument over the medium term.

Ceasefire Complicates the RBA's Next Move

The more immediate domestic implication of the ceasefire may be its effect on RBA policy expectations. The Reserve Bank of Australia raised the cash rate twice this year to 4.1 per cent.

Heading into this week, markets had been pricing a further rate increase toward 4.35 per cent at the May meeting, partly reflecting inflationary pressure from elevated energy prices following the Hormuz closure. The ceasefire and prospective Hormuz reopening materially alter that calculus. If energy prices retreat from above US$100 per barrel, the inflationary impulse compelling the RBA toward additional tightening diminishes.

That shift in rate expectations is a mixed signal for the currency. It removes some carry trade support while improving the broader economic outlook. National Australia Bank has maintained a year-end forecast of US73c, treating the conflict period as a fog-of-war phase rather than a fundamental reassessment.

Binary Risk Structure Narrows but Does Not Close

The two-week ceasefire reduces the probability of the severe downside scenario analysts had been flagging. Westpac had described the currency as balancing two sharply divergent outcomes, with a permanent Hormuz closure or ground escalation capable of pushing the Australian dollar toward the low US60s. That tail risk has meaningfully receded with Wednesday's announcement.

The upside scenario has correspondingly sharpened. A durable settlement that permanently reopens the strait could drive a sustained relief rally toward US75c by year-end. The 10-point Iranian proposal adds diplomatic substance that prior ceasefire discussions had lacked, though whether that framework survives the two-week negotiating window remains the central uncertainty for currency markets.

US Dollar Weakness Amplifies the Move

Wednesday's rally was amplified by broad US dollar weakness following the ceasefire. That weakness reflects a deeper structural erosion the conflict has accelerated. Global central banks have become net sellers of US Treasury debt, with foreign ownership declining from approximately half to one-third over the past decade. Gulf sovereign wealth funds reassessing their US dollar exposure, as the traditional security-for-petrodollar arrangement faces credibility pressure, adds a medium-term structural tailwind for alternative currencies including the Australian dollar.