Aussie falters ahead of RBA & US tariff deadlines
A dazed and slightly confused AUD/USD starts an important week that includes the RBA and the 9 July US reciprocal tariff deadline threatening to test below 0.6500.
Aussie falters ahead of RBA & US tariff deadlines
A dazed and slightly confused AUD/USD starts an important week that includes the RBA and the 9 July US reciprocal tariff deadline threatening to test below 0.6500.
AUD/USD flattered to deceive last week. While it only clocked a very moderate net gain of +0.4%, it betrayed a bid tone that we haven't been accustomed to for a while - repeated attempts to flush it down through to 0.6550 were easily swatted away. AUD traded to a 7 1/2 month high of 0.6590 and it was seemingly priming itself for another leg higher.
Cue the new week and it's a 180-degree turnaround.
AUD/USD has returned to form as a tried and true risk-proxy hedge. From opening levels around 0.6555/60 AUD/USD stumbled through a number of short term support levels to 0.6500, an outsized decline of more than 0.7% in local trading Monday.
There was always going to be a lot of tariff noise and headlines this week with the 90 day pause on US reciprocal tariffs ending 9 July. FX markets have been approaching this date with a fairly relaxed stance. Measures of implied volatility in and around 9 July betrayed no particular concern.
But the vibe is very different Monday. Maybe it's muscle memory and the trauma of 2 April Liberation Day.
Either way, a series of Truth Social postings late Sunday from President Trump got the ball rolling. Trump said letters would be sent to 12-15 countries from midday Monday (US time), notifying them of their new US bilateral tariff rates. Late last week reports suggested these new tariff rates would range from 10/20% to 60/70%, starting 1 August. Trump also said the US will place an additional 10% tariff on any country that aligns itself with “the Anti-American policies of BRICS", without exception.
These letters aren't necessarily the final word. Japan, South Korea, India, Thailand, Indonesia and others still have time and are reportedly clamouring to secure trade "framework agreements" or extensions to avoid tariffs. As Treasury Secretary Bessent said on the weekend, "We’re going to be very busy over the next 72 hours".
While AUD remains under pressure here, we note that US-China negotiations - Australia's key tariff exposure - are on a separate track. We don't anticipate any big headlines here this week. A US-China truce is in place for now. If anything, the news has been encouraging lately. China took steps two weeks ago to designate two fentanyl precursor substances as subject to export controls. This raises the encouraging prospect that the 20% fentanyl tariffs on China might eventually be dropped. That would unlock a material reset for AUD.
The big complication around this benign US-China scenario is that last week's US-Vietnam interim trade deal saw a 40% tariff agreed for goods that are trans-shipped through Vietnam. This indirectly targets exports from China, which has been routing goods and components through other countries to bypass US tariffs.
The 40% on trans-shipped goods implies that if there is any medium term US-China tariff relief, it's likely to be limited to the same 40% rate. Given that the current US total China tariff is 55% (10% baseline tariff + 20% fentanyl tariffs + 25% Trump 1.0 tariffs) there's not much room for US tariffs to fall.
In other news last week;
US payrolls grew 147k in June, relief to many angsting about the risks of a more abrupt slowing. (The caveat is that government hiring accounted for almost half the total gain). This "decent" jobs gain has pretty much shut the door to a potential Fed July cut. The USD saw at best only transient gains on Thursday's stronger June payrolls.
President Trump's One Big Beautiful Bill Act (OBBBA) was passed in law with the final terms including but not limited to:
- a permanent extension of the 2017 Tax Cuts and Jobs Act (TCJA);
- spending cuts to Medicaid of USD700bn over 10 years, ending the Biden-era student loan forgiveness and the Supplemental Nutrition Assistance Program (SNAP); and
- repeal of the clean energy tax credits.
The bill is expected to add USD3trn to US public debt over the next 10 years, bringing US national debt from 100% of GDP to 130% of GDP.
Aussie retail sales printed softer for May at 0.2% with rebounds in clothing and footwear the key pillars of growth. According to Westpac's Neha Sharma, retail spending has now fallen short of expectations every month since February, highlighting that spending habits have veered more cautious across households. While the Aussie Household Spending indicator printed stronger than expected at 0.9%, divergence with the retail sales indicator is likely attributable to differences in data sources and treatment of non-residents.
US equities broke record highs for the second consecutive week with the S&P up 2.25% aided by de-escalation within the Middle East. US bond yields also moved higher week-on-week as benign US employment data saw Fed rate cut expectations pared back to 53bp in the remainder of 2025 from 66bp. However, Fed independence has been brought into question recently with Trump saying that a new candidate will be announced earlier than anticipated.
On the commodities front, gold traded up by 0.39% last Friday, managing to finish the week above $3325/oz. Metals saw a solid correction with copper down 0.9% to $9,864 while aluminium was down 0.58% to $2,590. Iron ore softened slightly into the end of the week after strong gains had lifted prices to a 4-week high.
Political uncertainty was back on the rise in the UK as PM Starmer's lack of support behind his Finance minister's austerity measures seemed to question how long the incumbent will remain in power, with Nigel Farage's "Reform" party seemingly gaining popularity in recent weeks.
Turning to the week ahead, the deliberation around reciprocal tariffs will remain a key focus for markets with Trump claiming around 10-12 countries will receive letters around tariffs. With placeholder deals already struck with the UK, India and China, the EU bloc and Japan are like to come under pressure for their lack of headway on trade negotiations.
Domestically, the RBA and RBNZ June Monetary Policy Meetings will be closely watched with markets widely expecting delivery of a 25bp cut by the former and an unchanged policy rate by the latter. About 20bp in RBA rate cut priced for their next August meeting. It’s an open question what happens to that pricing if the RBA delivers a cagey and grudging narrative around a 25bp rate cut, as seems very likely.
Monday
- US Reciprocal tariff letters are sent
Tuesday
- NAB Jun Business Confidence Survey
- RBA Monetary Policy Meeting
Wednesday
- China Jun PPI, CPI
- RBNZ Monetary Policy Meeting
- RBA Deputy Governor, Andrew Hauser, speaks to economists in Sydney.
- US July 9 Reciprocal tariff deadline, FOMC June meeting minutes.
Thursday
- Japan Jun PPI
- Fedspeak; Regional Presidents' Musalem & Daly
Friday
- Germany's EUR$46bn tax-break package to be ratified by Upper House.
- UK Monthly May GDP
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