A front-footed Australian dollar eyes 0.7200 ahead of key events
The Australian dollar has started the week on the front foot, pushing back toward the 0.7200 area after a choppy end to last week. The week ahead is important, including Q1 local CPI, multiple central bank meetings, and of course ongoing high-stakes US-Iran negotiations all in focus.
A front-footed Australian dollar eyes 0.7200 ahead of key events
The Australian dollar has started the week on the front foot, pushing back toward the 0.7200 area after a choppy end to last week. The week ahead is important, including Q1 local CPI, multiple central bank meetings, and of course ongoing high-stakes US-Iran negotiations all in focus.
Early week AUD trading has traced out a familiar pattern - yet another Asia-Pac Monday opening gap lower in AUD/USD, albeit a modest 26 pips, that is fully retraced and some by Tuesday. Weekend US-Iran headlines have been escalatory more often than not, but in this case a very shaky ceasefire impasse was increasingly casting a pall over markets. This was sapping AUD late last week, which was unable to hold to the high-0.7100s. Cue Iran's proposal on Monday to reopen the Strait, in exchange for the US ending their blockade and deferring thornier nuclear issues to a later date.
Markets took this as a constructive step, sending AUD/USD up from Monday’s local gap low of 0.7126 to a Monday night high of 0.7200. AUD/USD repeatedly found a floor in the 0.7110–0.7125 area last week, and this area proved itself yet again Monday.
Let’s see where this latest proposal goes. Each side admittedly sits in a maximalist negotiating posture - far apart. Encouragingly, the US Administration has not dismissed Iran’s proposal out of hand. Just as well.
Risk assets remain in charge
Risk assets have covered a significant amount of bullish ground in recent weeks. The S&P500 is at record highs (7173+) and the MSCI All Country World Index has posted a huge 10% rise in April. Credit markets are open for business too, with most days seeing oversubscribed jumbo deals. Risk assets are not fretting about the energy supply shock and disruption - far from it. This has been crucial to AUD’s rebound in recent weeks.
This has washed over all the key AUD-crosses. AUD/JPY hit another 36yr+ high on Monday (JPY114.71). AUD/EUR has yet to fully recoup its early March 18-month highs of 0.6200, but its grinding in that direction (0.6130 early this week).
AUD/NZD refuses to roll over too. This cross has been bouncing around inside the 1.2100-1.2200 area over the last two weeks - consolidation at 13yr highs. This is the case even though Q1 NZ CPI data was recently on the stronger side, and the RBNZ has sounded more front-footed and prepared to take back some accommodation sooner.
Stepping back from the day to day noise, it's pretty clear that FX markets have given their overall verdict on the war. Since the outbreak of the war in late February the higher yielding commodity FX have net firmed – the Brazilian Real, Norwegian Krone and the Australian dollar. Traditional safe havens (the Japanese yen and the Swiss franc) and energy vulnerable Asia-Pac emerging market currencies are net weaker.
Oil sends a very different message
The big question is whether the gains in risk assets and the outperformance in the commodity currencies is sustainable. There is clearly a dissonant message coming from global stock markets and the hard reality in the Strait.
Front month Brent crude is at levels that imply ongoing disruption. The growing sense of stalemate around US-Iran negotiations last week saw dated front month Brent crude futures climb back towards $110/bbl and the latest Iran proposal has done nothing to arrest the momentum. Brent crude touched a low $86.09 at the height of the ceasefire and Strait reopening optimism on 17 April, and has since rebuilt much of the supply risk premium.
But this divergence across markets is not unprecedented. Risk assets often rebound hard and early in the face of shocks and obvious recessionary upheaval, i.e. Covid 2020.
While energy markets must price the physical disruption to oil flows, risky assets are not as hostage. Looking back, risk assets navigated the messy US-Iran posturing during the ceasefire and kept the left tail compressed – seeing it all as more of a case of manageable “coercive bargaining”, not a genuine breakdown. Back-channels stayed open as positions hardened and evidently that’s been the “tell”.
There wasn’t a lot of data for markets to hang onto last week. Encouragingly, preliminary April business PMIs in Australia and the US, rebounded from their March “shock lows”.
The US Department of Justice dropped their criminal inquiry into Fed Chair Powell late last week. This paves the way for key US Senators to end their blockade of Kevin Warsh’s confirmation as new Fed Chair. The Senate Banking Committee is expected to vote this week. Kevin Warsh is now well-placed to take up the role of Chair when Powell’s term ends mid-May. Though, Powell may well continue on the Board, something that is sure to rankle the US Administration.
Data and central bank meetings take centre stage
The calendars are loaded this week; BOJ, FOMC, ECB and BoE policy rate meetings, Australia Q1 CPI, the first look at US Q1 GDP and global PMIs.
The 5 May RBA meeting is priced at close to +20bp ahead of Wednesday's CPI and 65bp in rate hikes through to the Bank's Nov 2026 meeting. A strong CPI cements AUD yield support.
The energy supply shock is expected to lift headline CPI 1.4% q/q, pushing the annual rate to 4.8%, from 3.7%. The late Feb onset of the war though means that the much broader impact beyond auto fuel is expected in the June quarter. The trimmed measure is forecast to print at 3.3% y/y, unchanged.
Markets are expecting hawkish holds across the sweep of central bank meetings this week.
Is the BoJ a preview of things to come this week? They are a special case but today’s BoJ Board was more divided than usual. Today’s on hold policy decision showed more hawkish dissent (6-3 in favour of keeping policy steady vs typically 7-2 or 8-1) and the statement showed a lower bar for hikes - sustaining growth momentum rather than further “improvement” could compel hikes down the road.
Fed Chair Powell’s messaging in recent weeks has been patient and non-committal, alert to risks on both sides of the Fed’s dual jobs and inflation mandate. But risks are arguably skewed toward a slightly more hawkish framing. This could give the USD a temporary bid.
Equally important - five of the “magnificent seven” US tech giants release earnings this week.
Tuesday
- US Apr Richmond Fed Index, Conf. Board Consumer Confidence
Wednesday
- Australia Mar CPI
- RBNZ Gov. Breman speaks.
- BOC Policy Rate Decision
- US FOMC Rate Decision
Thursday
- Australia Mar Private Sector Credit, Q1 Import/Export Price Index
- China Apr RatingDog PMI, Manf. + Non-Manf. PMI
- Eurozone Apr CPI (Prelim.), Mar Unemployment Rate, Q1 GDP (Adv.)
- BOE Policy Rate Decision
- ECB Policy Rate Decision
- US Q1 GDP (Adv.), Mar PCE, Durable Goods Orders
Friday
- Australia, Japan, UK & US Apr S&P Global Manf. PMI (Final.)
- Japan Apr Tokyo CPI
- Australia Q1 PPI
- US Apr ISM Manf.
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