Oil prices soar, this currency "unexpectedly" becomes a safe haven

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

On Wednesday, the AUD/USD rose to 71.78 cents, the highest since June 2022, and the yen also reached its strongest level in 35 years, making it the best-performing major currency this year. The driving factors are persistently high oil and gas prices and market expectations that the Reserve Bank of Australia will raise interest rates as soon as next week. Citibank forecasts that the AUD could rise to 75 cents within three months.

This trend defies the traditional pattern of the Australian dollar weakening during geopolitical tensions. Nick Twidale, Chief Market Analyst at AT Global Markets Sydney, said, “In the current environment, the AUD is a better choice than other currencies,” but he also pointed out that this “contradicts the usual direction seen during geopolitical tensions—where the AUD typically weakens across the board, especially against the yen.”

Hike expectations boost yield advantage

Interest rate expectations are one of the core drivers supporting the AUD. The 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 issued hawkish statements, clearly indicating that if tensions related to Iran escalate further and increase inflation pressures, it will not hesitate to raise policy rates.

These expectations have pushed Australian government bond yields to the highest among developed countries. The spread between Australian and U.S. benchmark yields widened to its broadest since October 2022 on Tuesday, further enhancing the attractiveness of the AUD. According to options market data compiled by Bloomberg, as of early Wednesday, the probability of the AUD reaching 75 cents within three months is nearly 33%.

Energy exports provide additional support

In addition to interest rate factors, Australia’s role as a major energy exporter benefits it further amid high oil and gas prices.

Citi strategist Dirk Willer wrote in a client report, “Even during the most intense market pressures related to Iran, the AUD saw little significant selling, as the positive trade terms combined with the RBA’s hawkish stance to provide support.”

Citi 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 AUD could re-accumulate. Analysts note that as long as energy prices remain high, the AUD can continue to benefit from improved trade conditions, maintaining relative resilience amid broader market volatility.

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