Blockade thwarts the Australian dollar’s rebound
The Australian dollar starts the week contending with yet another round of weekend war-related headlines. A two-week US-Iran ceasefire is technically still alive, but effectively on life-support. Weekend US-Iran negotiation yielded nothing, and President Trump has since announced a naval blockade targeting Iranian ports. The Australian dollar opened the week US¾ of a cent lower on this news. But it found a floor just below USD0.7000, and faces a more active local calendar this week - Mar/Apr consumer and business surveys, Mar labour force, several RBA speaking engagements and China’s Q1 GDP and March activity data.
Blockade thwarts the Australian dollar’s rebound
The Australian dollar starts the week with yet another round of consequential weekend war-related headlines to contend with. An uneasy two-week US-Iran ceasefire is technically still alive, but it is effectively on life-support. Weekend US-Iran negotiations in Islamabad yielded nothing, and President Trump has since announced a naval blockade, specifically targeting shipping entering and leaving Iranian ports. The Australian dollar opened the week US¾ of a cent lower on this news. But it found a floor just below USD0.7000, and as has been fairly commonplace since the war started, it is now clawing back the opening gap lower. The Australian dollar’s singular focus on energy/Mideast risks will be diverted periodically by a more active local data/event calendar this week - Mar/Apr consumer and business surveys, Mar labour force and several RBA speaking engagements. The Australian dollar will also keep an eye on China’s Q1 GDP and March activity data this week.
Monday messiness
Since the US-Iran war started late February, Monday mornings in Asia are no longer sleepy affairs for markets. In virtually every instance since the war started - six of seven to be exact - the Australian dollar has gapped lower on the local open, including today.
21 hours of high level US-Iran talks over the weekend in Islamabad yielded little. Readouts suggest that there is still a very large divergence on core strategic issues - reopening the Strait and Iran’s nuclear program. On its own, this is enough to shake up the “ceasefire optimism” that washed over markets last week.
But President Trump took things further on the weekend and announced a blockade of the Strait of Hormuz. This obviously threatens the temporary truce and markets responded accordingly. Brent and West Texas oil futures are 7-8% higher to start the week, US equity futures are down almost 1% and the USD once again caught a “risk-off” bid across the board.
Last week’s ceasefire optimism produced a very decent bounce in the Australian dollar - from around USD0.6900 at the start of last week we rose to a high of 0.7095 - and closed the week out at 0.7064.
But the weekend news has produced another “customary” Monday opening gap lower - a low around 0.6986 in very early Asia trade today. In the last few weeks of the US-Iran war these Monday opening gap moves lower are typically fully retraced, and then some, in the subsequent 12-72 hour window. This week is so far proving to be no different, with the Australian dollar trading up to 0.7040 as we approach the handover to Europe.
From here, markets are now awaiting clarity. The blockade begins Monday 10am US EDT and the statement from US Central Command says, “The blockade will be enforced impartially against vessels of all nations entering or departing Iranian ports and coastal areas, including all Iranian ports on the Arabian Gulf and Gulf of Oman…”
This blockade would essentially remove Iranian oil entirely from the marketplace, if not more in the event of retaliation. It also raises thorny questions about passage for vessels going to countries that are paying a USD2mn “toll fee” and have negotiated exemptions. In a nutshell, there is a risk of a resumption of active conflict, leaving the status of the ceasefire genuinely uncertain.
This leaves markets primed for another week of volatility, and hostage to headlines, as they seek clarity whether the ceasefire holds or collapses entirely.
The Australian dollar crosses are very highly correlated at the moment against this backdrop. With the exception of AUD/NZD, last week’s ceasefire optimism lifted all the key AUD-crosses.
AUD/JPY staged a 3-big figure rally last week, rising from just below JPY100 early last week to almost JPY113 by Friday. AUD/JPY gapped lower to start the week and it is finding its feet in the mid-112s right now.
AUD/EUR retook the 0.6000+ level last week too (high of 0.6059), clocking a 1%+ gain for the week. The weekend war news has made for a messy start to the week for the AUD/EUR cross - it has traversed the entirety of last week’s range in a few hours of trading, though the cross is stabilising just above 0.6000.
The AUD/NZD cross matched these AUD-cross movements in the early part of last week - in fact AUD/NZD traded to yet another 13yr+ high mid-week of 1.2208. But the RBNZ landed more hawkishly last week, with Governor Breman saying that the Bank will “act decisively” if core inflation accelerates. Forecasters pulled forward their expectations for the start of rate hikes, from very late 2026, to the June and September quarters. This pulled the rug from the cross, sending it back to 1.20-1.21 late last week.
Ceasefire optimism punctured
Ceasefire optimism saw risk appetite recover last week, with the S&P500 and Dow Jones climbing more than 3%, while the Nikkei rose 5.5%. US equity futures however are pointing to a soft open this week.
US 10yr yields remain below their March highs of 4.48%, dropping to 4.23% last Wednesday following the 2-week ceasefire news. The weekend news on US-Iran negotiations (strategic stalemate) and the planned blockade is obviously problematic for the inflation outlook and fixed income markets. Vessel traffic through the Strait shows that it is as tightly throttled as ever. The US-Iran ceasefire did not shift this needle one little bit, despite vague suggestions otherwise. Ergo, there’s no reasons to be optimistic on supply chains and energy infrastructure.
In a similar fashion, Brent crude oil fell more than 18% intra-day following the ceasefire announcement mid last week to just above $90/bbl. However with US-Iran talks producing nothing substantive over the weekend, and the US planning to impose a blockade on Iranian ports, crude is back above $100/bbl on Monday.
The price action in gold from its Mar 23 lows ($4099/oz) has been encouraging, trading above $4700/oz on Monday with YTD gains of 9%. Let’s see if gold can hold onto last week’s gains. A stronger US dollar and higher US yields (not to mention very crowded retail and speculative positioning) stymied gold over the war. A resumption of hostilities could see these dynamics return.
A busier local calendar can impact RBA pricing
Local calendars are headlined by March Australia jobs data and RBA speak from Deputy Gov. Hauser (Tue & Wed) and Assist. Gov. Hunter (Thur), alongside Westpac/NAB sentiment surveys. With the recent surge in energy prices fuelling infation expectations, RBA Gov. Bullock has hinted that a back-to-back rate hike is a live possibility. Markets will assuredly be watching intently for any forward cues from this week's RBA speak.
Market consensus expects the unemployment to hold steady at 4.3% in March and for 18k jobs to be added. While this print will capture the first 2 weeks of the US-Iran conflict, it is unlikely that any impacts from the conflict or recent rate rises will show up in the data this early.
We also receive April Westpac Consumer Confidence and NAB Business Sentiment data. A prolonged conflict with Iran sparking energy inflation/growth worries alongside a relatively hawkish RBA has dampened sentiment lately - we expect this gloomy sentiment held moving into April.
The IMF and World Bank will hold Central Bank spring meetings in Washington this week, and major US banks kick off the US earnings season.
Monday
- Fedspeak; Miran
Tuesday
- Australia Apr Westpac Consumer Conf., Mar NAB Business Confidence
- China Mar Trade Bal.
- US Mar PPI, NFIB Small Business Survey
- Fedspeak; Barr, Goolsbee, Barkin, Collins & Paulson
Wednesday
- RBA Deputy Gov. Hauser speaks.
- US Apr Empire State Manf., Fed Beige Book
- Fedspeak; Bowman, Barr
Thursday
- Australia Mar Employment Data, Mar MI Consumer Inflation Exp.
- RBA Assist. Gov. Hunter speaks.
- China Q1 GDP, Mar Retail Sales, Industrial Production
- UK Feb Monthly GDP
- Eurozone Mar CPI (Final)
- Fedspeak; Williams, Miran
Friday
- Fedspeak; Waller, Barkin
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