Oil prices soar, this currency unexpectedly becomes a safe haven

Amid global market turmoil, the Australian dollar is unexpectedly rising as a safe-haven asset.

On Wednesday, the Australian dollar rose to 71.78 cents against the US dollar, the highest level since June 2022, and also reached its strongest level against the yen in 35 years, becoming the best-performing major currency this year. This trend is driven by persistently high oil and gas prices, as well as strong market expectations that the Reserve Bank of Australia will raise interest rates as early as next week. Citigroup expects the Australian dollar's rally could reach 75 cents within three months.

This trend overturns the traditional pattern of the Australian dollar weakening during periods of geopolitical tension. Nick Twidale, chief market analyst at AT Global Markets in Sydney, stated, "In the current environment, the Australian dollar is a better choice than other currencies," but he also noted that this "contradicts the traditional direction we usually see during geopolitical tensions—when the Australian dollar tends to weaken across the board, particularly against the yen."

Rate Hike Expectations Boost Yield Advantage

Interest rate expectations are one of the core drivers supporting the Australian dollar. Current pricing in the interest rate swap market shows that the probability of the Reserve Bank of Australia raising rates at the March 17 meeting has exceeded 70%. The RBA has previously made hawkish statements, clearly indicating that it would not hesitate to raise policy rates if the conflict in Iran further exacerbates inflationary pressures.

This expectation has pushed Australian government bond yields to among the highest in developed countries. The spread between Australian and US benchmark yields widened on Tuesday to its widest level since October 2022, further enhancing the attractiveness of the Australian dollar. According to options market data compiled by Bloomberg, as of Wednesday morning, the probability of the Australian dollar reaching 75 cents within three months is close to 33%.

Energy Exporter Status Provides Additional Support

In addition to interest rate factors, Australia's status as a major energy exporter has allowed it to benefit further amid high oil and gas prices.

Citigroup strategist Dirk Willer wrote in a client report, "Even during the most intense market pressures related to Iran, the Australian dollar has seen almost no significant selling, with the positive impact of trade conditions and the RBA's hawkish stance working together to provide support."

Citigroup believes that if oil prices stabilize at high levels rather than continue to rise, combined with the RBA maintaining a hawkish tone, the upward momentum of the Australian dollar is likely to rebuild. Analysts point out that as long as energy prices remain high, the Australian dollar can continue to benefit from improved trade conditions, thereby maintaining relative resilience amid broader market volatility