Aussie Explores the High 0.65s
AUD/USD starts the week at the higher end of its ranges for the past month. But in the grand scheme, it’s still treading on very familiar terrain, closing on a 0.64 or 0.65-handle virtually every trading day since 13 May. There’s a lot riding on this week’s global calendars, but it’s not clear AUD is primed for a breakout. US PPI and CPI data for August, alongside provisional benchmark revisions to US payrolls lead the calendars. Australia’s calendar is lower-key: Westpac Sept consumer sentiment and NAB’s Aug business survey.
Aussie Explores the High 0.65s
AUD/USD starts the week at the higher end of its ranges for the past month - in the 0.6550-0.6585 area.
But in the grand scheme, it’s still treading on very familiar terrain, closing on a 0.64 or 0.65-handle virtually every trading day since 13 May, almost 4 months ago. Clearly it’s going to take a lot to dislodge AUD from this extended stretch of “sleepy” range trading.
There’s a lot riding on this week’s global calendars, but it’s not clear AUD/USD is primed for a breakout. US PPI and CPI data for August, alongside provisional benchmark revisions to US payrolls lead the calendars. We will also be watching the ECB’s rate decision and a no confidence vote on French PM Bayrou’s budget measures. Australia’s calendar is lower-key: Westpac Sept consumer sentiment and NAB’s Aug business survey.
We call out three macro stories for AUD and global FX last week. In no particular order: 1) stronger local Q2 GDP; 2) weak US labour market data; and 3) political/fiscal upheaval in various capitals which is producing a lot of whipsaw in global bond markets.
Q2 local GDP bucked the lacklustre trend of the last couple years with growth picking up to 0.6% q/q, from an upwardly revised 0.3% in Q1. This was stronger than markets and the RBA expected. Consumer spending picked up pace, helping offset still soft business investment and easing public demand, which has long been the mainstay of growth.
RBA Governor Bullock said she does not know what the stronger growth means for interest rates "at this stage". But she mused that "it's possible that if it keeps going, then there may not be many interest rate declines left to come".
Admittedly, neither local rates nor AUD were moved much by the data. AUD rose only very modestly in the immediate wake of the stronger Q2 GDP, while rates markets only modestly scaled back their RBA rate cut expectations - OIS pricing for the Bank’s Sept meeting slipped from -25bp to -23bp.
But this story is worth monitoring. After a lacklustre couple months full-time employment growth rose 61k in July (reported 14 Aug). Westpac’s consumer sentiment survey reported a near 6% gain in August (reported 19 August). The July monthly CPI indicator firmed more than expected too (reported 27 August), picking up from 1.9% y/y to 2.8% y/y (albeit due electricity rebates ending). To cap it off Q2 GDP looked stronger than we have seen in a while.
Against that a raft of US labour market data last week underwhelmed, most notably of course August payrolls. Non-farm payrolls grew just 22k, well below expectations for a 75k gain. Weakness was scattered through the details. Downward revisions to June now show payrolls fell in that month. Unemployment rate rose to 4.3% in August, its highest level since 2021. Manufacturing jobs declined 12k, taking losses to 78k over the last year. The "DOGE” effect appears to be in full swing with federal employment falling 15k in the month.
This all but seals a Fed rate cut at their September meeting in two weeks time, barring a very significant upside surprise in this week’s US Aug PPI and CPI.
Long dated bond yields continue to push higher in various core markets too. 30 year Japanese JGB yields hit 3.30% last week, their highest in at least 26 years. 30 year UK gilt yields hit 5.75%, their highest level in 27 years. US 30 year yields edged towards 5% too, before slipping back on the soft US jobs data. Long dated bond markets are being hit by a problematic mix of rising issuance, sticky inflation, vastly reduced central bank support and political gridlock/fracturing in Paris and Tokyo.
An aggressive pressure campaign on the Fed by the Trump Administration, raising doubts about their independence, is also obviously a key factor too. The Fed’s independence is enshrined in law and tradition and they have been stridently nonpartisan for several decades. But developments around Fed Governor Cook’s dismissal case bear close watching. Depending on how it plays out, concerns around Fed independence could rise to a more troubling degree.
If President’s Trump’s dismissal of her tenure succeeds we could see another “Trump-loyal” nomination, potentially creating a 4-3 Trump leaning “dovish-majority" on the Fed board. But more importantly, that potentially could give the Board of Governors the power to override regional Fed presidents.
The Fed's Board of Governors votes on reappointing the 12 regional Fed presidents routinely to 5 year terms at the start and the middle of each decade. The next vote is in early 2026. This is typically a simple formality. But it's not entirely far-fetched to think that Trump "loyalists" on the Board of Governors might complicate this voting appointment process if some regional presidents are not deemed "acceptable". This arc of this story has a lot further to run.
The combination of stronger local Q2 GDP, fiscal and political upheaval in France, UK and Japan, and soft labour market reports in the US and Canada, helped shift the needle for AUD crosses last week.
AUD/GBP and AUD/EUR are trading around 1mth+ highs, just shy of 0.4900 and just above 0.5600 respectively. AUD/CAD is at six-month highs near 0.9100, while AUD/JPY is re-testing multi-week highs just above 97.00. AUD/NZD hit a brick wall last week at 1.1160 and its drifting back to 1.1100.
In the week ahead, we are focusing on the US August CPI and PPI reports. Will these reports show more convincing evidence of tariff cost inflation pass through to consumers, or will they be well behaved, potentially opening the door to a larger 50bp Sept Fed rate cut? We’ll see.
On Tuesday the BLS also releases their preliminary payrolls benchmark revisions for the year to Mar 2025. Most commentators are bracing for a downward revision in the vicinity of -400k to -800k jobs.
The ECB meeting is likely to be a non-event.
We will also be watching political developments in Paris and Tokyo. PM Ishiba stepped down over the weekend, potentially ushering in extended period of political uncertainty in Japan. The LDP lack majorities in both Japan’s houses and rely on support from minor parties. These minor parties want more fiscal spending in exchange for support, keeping pressure on long dated bonds. French PM Bayrou faces a confidence motion around EUR44bn in budget cuts.
Good luck in the week ahead.
Monday
- EUR: French PM Bayrou confidence vote over planned budget measures
Tuesday
- Australia Sept Westpac Consumer Sentiment, Aug NAB Business Confidence
- US BLS Preliminary Benchmark Payrolls Revisions for year to Mar 2025
Wednesday
- China Aug PPI/CPI
- US Aug PPI
Thursday
- EUR: ECB Policy Meeting/President Lagarde Press Conference
- US Aug CPI
Friday
- Aus RBA Assistant Governor Jones speaks
- US Michigan Sept Prelim Consumer Sentiment
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