Hope alone can’t keep the Australian dollar above 0.7200
Big moves in the Australian dollar on Monday mornings have become increasingly common since the US-Iran war began, and this week is no exception. After touching a new peak of 0.7222 on Friday optimism around the reopening of the Strait, the Australian dollar is back in the mid-to-low 0.71s today. This week’s data calendar is relatively light. Fed Chair nominee Kevin Warsh faces his Senate confirmation hearing on Tuesday, and his framing of monetary policy in the face of an energy shock will matter for FX markets. Other events include April flash PMIs, US March retail sales and New Zealand Q1 CPI.
Hope alone can’t keep the Australian dollar above 0.7200
Big moves in the Australian dollar on Monday mornings have become increasingly common since the US-Iran war began, and this week is no exception. After squeezing US½ cent higher late Friday to a new peak of 0.7222 on optimism around the reopening of the Strait of Hormuz, we unwound those gains into the close and gapped lower at the Asia open today. The low this morning was 0.7117 as those hopes unravelled.
This week’s data calendar is relatively light. Fed Chair nominee Kevin Warsh faces his Senate confirmation hearing on Tuesday, and his framing of monetary policy in the face of the energy shock will matter for FX markets. Other events include April flash PMIs, New Zealand Q1 CPI, and US March retail sales.
Since the war began in late February, consequential developments have had a habit of landing on weekends, reinforcing a familiar weekly rhythm in price action. In this instance, markets are being reminded that the path to a durable US-Iran off‑ramp is fraught and messy. In short, hope alone cannot keep the Australian dollar above 0.7200.
The price action in crude oil tells the story even more clearly. Brent front‑month futures fell more than 10% late Friday after Iran announced that the Strait of Hormuz was “completely open” to commercial passage, sliding from around USD96/bbl to USD86/bbl. But that move quickly ran into doubt. Brent retraced roughly half the decline before the Friday close and then gapped more than 6% higher at the Asia‑Pac open. Spot Brent is currently trading around USD94.70/bbl.
Headline noise or new risk regime for the Australian dollar?
At this juncture, the key question for the Australian dollar and global markets is whether this volatility is simply “noise” or the beginning of a fundamentally new regime - the start of a hard US-Iran impasse. The posturing over the weekend is certainly striking and there’s a non‑trivial chance that this could represent a genuine unravelling.
That said, there’s also the context of the two-week ceasefire expiring tomorrow. It is plausible that each side is establishing maximalist negotiating positions ahead of the next round. One thing is clear: US-Iran communications remain active, so there's a public hardening of positions and private engagement unfolding alongside each other.
Despite the messy back‑and‑forth recently, the broader arc in the last couple weeks has still been constructive. AUD rose almost US2 cents from last Monday’s low, even before Friday’s volatility set in. It has fully recouped the the March declines.
The Australian dollar also forged ahead on the key cross rates too. AUD/EUR is again testing the 0.6100 area, retracing around half of the war‑related losses seen in March as global growth risks were priced more aggressively. AUD/JPY reached a new 36‑year high last week at JPY114.38, driven by risk‑on sentiment and dovish hedging from Bank of Japan officials ahead of their April meeting. That shift has weighed broadly on the yen.
But even if we do ultimately gravitate towards less overt US–Iran military conflict, the longer‑term global questions remain significant - particularly for inflation and interest rates. For decades, “rules‑based” open access through the Strait of Hormuz was taken for granted. Iran’s reframing of access as conditional poses a challenge to that equilibrium. Even without active conflict, a world of conditional access implies structurally higher oil prices, shipping costs and inflation than otherwise. Shipping volumes through the Strait did show tentative signs of improvement late last week, but they remain only a fraction of pre‑war levels.
Risk assets in the resolution camp. Rates & oil in the disruption camp
With so much hinging on US–Iran developments, cross‑asset correlations remain unusually high. As ceasefire optimism surged last week, the S&P 500 pushed to repeated all‑time highs, rising 3.7% over the week. The tone is notably more cautious to start this week, however. US equity futures are off their worst levels but still point to a weaker open.
Brent spent most of last week below USD100/bbl, well off its March highs just shy of USD120/bbl. Peak optimism late Friday briefly drove Brent as low as USD86.09/bbl. We begin this week closer to USD94/bbl - still materially above pre‑war levels around USD70/bbl.
Fixed income markets continue to see elevated volatility, with wide intraday ranges now the norm. Even so, the trend is clear. US 10‑year Treasury yields peaked at 4.48% on 27 March, around 54bp higher than pre‑war levels, and have since retraced - albeit unevenly - to around 4.26%.
Pulling these moves together, two camps are emerging. Risk assets have been quicker to price a ceasefire and eventual resolution. Equities pushed to record highs last week and AUD/USD printed its strongest level in around four years.
By contrast, oil prices and bond yields remain far more cautious. Part of that disconnect likely reflects positioning. More importantly, crude oil must price the physical supply constraint — the flow of molecules through the Strait - while bond markets must explicitly discount the inflation outlook. Currencies and equities are exposed to these forces too, but in a less direct way.
Sentiment takes a hit
Last week’s local data showed early signs of sentiment damage from the energy shock. Westpac April consumer sentiment tumbled 12.5%, its largest monthly fall since the Covid period, while NAB business confidence in March slumped to ‑29 from ‑1. Household inflation expectations and business pricing pressures also jumped.
Hard data, as ever, is slower moving. March employment rose by 18k, full‑time jobs increased by 49k, and the unemployment rate held steady at 4.3%.
Looking ahead, the coming week is quieter than last. Warsh’s confirmation hearing remains the key focal point, alongside NZ Q1 CPI, US retail sales and April flash global PMIs.
One additional political risk bears watching. If Warsh is not confirmed before Chair Powell’s term ends on 15 May, Powell would ordinarily continue as Chair pro tempore. President Trump has indicated he would seek to remove him instead, raising the stakes around the confirmation timeline.
Tuesday
- NZ Q1 CPI
- UK Feb labour market statistics
- US Mar retail sales, Fed Chair nominee Kevin Warsh Senate confirmation hearing
Wednesday
- Australia Westpac Mar leading index
- UK Mar CPI
Thursday
- Australia, Japan, Europe, UK & US Apr flash PMIs
Friday
- Japan Mar CPI
- US Mar final Michigan consumer sentiment
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