Australian Dollar Outlook: Strait of Hormuz Risk Clouds AUD/USD Rally

The Australian dollar is holding up better than many expected, supported by hawkish RBA expectations and resilient domestic data. But beneath the surface, cracks are forming.

Positioning is becoming increasingly stretched, options markets are skewing bearish, and geopolitical risks in the Middle East are threatening to inject fresh volatility into global markets. With the Strait of Hormuz back in focus and oil prices elevated, traders face a more complex backdrop where risk sentiment and inflation dynamics could quickly shift the narrative for AUD/USD.

 

View related analysis:

• AUD/USD, EUR/AUD Outlook: RBA Hikes Again as Inflation Pressures Build
• FX Futures Positioning: USD, EUR, GBP, JPY | COT report
• US Dollar Rallies Post Fed, USD/JPY Eyes 160, USD/CHF Breaks Higher
• Australian Dollar Outlook: RBA Rate Decision and AUD/USD Pullback Risks

 

Strait of Hormuz Risk Clouds the Australian Dollar

Australian Dollar Performance

The Australian dollar continues to show signs of a fatigued rally when comparing price action among its peers on the weekly chart, yet it remains a market that has, for now at least, failed to commit to a meaningful pullback.

• While AUD/USD closed 0.6% higher for the week, it was the weakest FX major on Friday, falling -1% and forming another volatile shooting star candle to warn of weakness in the trend
• AUD/CAD also formed a volatile 1-week reversal candle, once again stalling around the February high
• AUD/NZD snapped a 7-week winning streak and failed to close above 1.12 for a second consecutive week
• AUD/JPY formed a small bullish inside bar, alongside its second consecutive shooting star candle to warn of weakness around 112
• EUR/AUD snapped a record-breaking 12-week bearish run with a small bullish inside week
• GBP/AUD formed a small bullish pinbar, also hinting at a near-term inflection point against an otherwise strong bearish trend

 

Source: LSEG, TradingView

 

Australia This Week: Economic Data and Events for AUD/USD Traders

The RBA delivered its expected 25bp hike, and the only factor preventing a more hawkish stance was, of course, the war in Iran. The decision was surprisingly close, with a 5–4 split in favour of the hike. For now, RBA cash rate futures imply a 67% chance of another hike to 4.35% in May.

This places greater emphasis on Wednesday’s monthly inflation report. It will not capture the recent crude oil spike stemming from the Middle East, but it may not need to—as even a modest uptick from already elevated inflation would remind the RBA that price pressures persist.

The bigger unknown is how long the conflict in the Middle East will last and what impact it will have on the local economy. However, with PMIs trending higher, the case for a hold in May already appears to be fading.

 

 

Strait of Hormuz Risk Puts Markets on Edge

Of course, the bigger elephant in the room is the Middle East. President Trump has reportedly issued a 48-hour ultimatum for Iran to reopen the Strait of Hormuz or face potential strikes on key infrastructure.

This sets up a potentially volatile start to the week—likely spilling into Tuesday morning in Australia if the deadline passes without resolution, given the timing of US market hours.

Iran appears to have few favourable options. Conceding quickly risks signalling weakness, particularly for a new leadership facing internal and external pressure. That raises the risk of a prolonged standoff, which in turn keeps upside risks for oil prices and safe-haven flows firmly in play.

 

 

AUD/USD Technical Analysis: Australian Dollar vs US Dollar

AUD/USD Futures Positioning | COT Report

• Asset managers increased their net-long exposure to a record high of 42k contracts.
• What makes this more notable is that 42k contracts long is not extreme in absolute terms, but it is highly unusual for this group.
• Large speculators increased their net-long exposure to a 9-year high of 69k contracts.
• They increased gross longs by 14.7k contracts to 163k, not far from their record high set in 2012.
• Large speculators trimmed net shorts to their lowest level since December 2024.

 

Source: CFTC, CME, LSEG

 

AUD/USD Correlations: CNH and NZD Drive the Aussie

• The Chinese yuan (CNH) remains the dominant driver for the Australian dollar, with correlations above 0.8 across all timeframes
• The relationship with the New Zealand dollar has strengthened notably over the past 10 days, with correlation rising to 0.91
• The inverse relationship with the US dollar is also strengthening, with the 10-day correlation at -0.84
• Correlations with gold and copper have weakened, while the 10-day correlation with crude oil has turned sharply negative (-0.75)
• There is no consistent relationship with equity indices based on the current correlation structure

 

Source: LSEG

 

 

 

Australian Dollar Defies Bearish Options Skew

They call it the battler for good reason, with AUD/USD refusing to roll over despite options traders ramping up downside protection across multiple timeframes. The 1-week 10-delta risk reversal (red line) shows tail risk is firmly skewed towards puts and is on the cusp of reaching its most negative levels since April—when AUD/USD last tested 0.60. The 1-week and 1-month 25-deltas also show institutions are increasingly favouring downside protection.

Hawkish RBA policy expectations remain a key supporting factor for the Aussie. However, if tensions in the Middle East escalate further, we could reach a point where this begins to weigh on the Australian dollar—which is already struggling to break to new highs despite expectations for another RBA hike in May.

A break below 0.6900 likely signals a deeper, risk-off driven pullback. Until then, traders are likely to favour buying dips and extracting what they can from this messy range between 0.6950 and 0.7150.

 

Source: ICE, TradingView

 

 

View the full economic calendar

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge