Australian dollar: Calm on the Surface, Vol Underneath?
The Australian dollar rose almost 1% last week, and starts the new week tentatively exploring 0.7200+. The Australian dollar’s gains were bested only by the Japanese yen last week, whose surge was fuelled by intervention. This encouraging Australian dollar performance was matched by repeated record highs in equities, and came despite a hawkish FOMC and threats of renewed US strikes on Iran. The week ahead is dense with important data and event risk, including the RBA and US payrolls.
Australian dollar: Calm on the Surface, Vol Underneath?
The Australian dollar rose almost 1% last week, and starts the new week tentatively exploring 0.7200+. The Australian dollar’s gains were bested only by the Japanese yen last week, whose surge was fuelled by intervention. This encouraging Australian dollar performance was matched by repeated record highs in equities, and came despite a hawkish FOMC and threats of renewed US strikes on Iran. The week ahead is dense with important data and event risk, including the RBA and US payrolls.
Choppy week, but AUD pushes higher
At the time it felt quite messy for the Australian dollar last week. The balance of short term risks swung back and forth. At one stage the Australian dollar established a new low for this ceasefire range, at 0.7101, not long after the less threatening local Q1 CPI, and as global markets weighed up the risk of renewed US strikes on Iran.
But this low only counts as a very minor extension of the downside parameters of AUD’s “ceasefire range”. In any case these lows were quickly walked back. By week’s end the Australian dollar’s mood and cadence turned. On Friday night the Australian dollar then pierced its ceasefire ceiling, briefly setting a new high at 0.7228.
So, for the week as a whole, AUD rose against most counterparts, albeit with turbulence along the way. There was also something of a stealthy quality to the move: the bulk of the gains occurred within the prevailing ceasefire ranges, which remain broadly intact. The rough parameters are still 0.7100–0.7230, with both edges stress‑tested - and only marginally expanded - last week.
US-Iran headlines continue to shape markets and the Australian dollar
Both physical and dated front month contracts for Mideast blends, European Brent and US WTI rose last week. The front month Brent contract traded to a new high of $126.41, while front month WTI traded through $110 (not a new high). Futures contract rolls had a lot to do with these moves.
The news around the US-Iran ceasefire impasse was hardly constructive either. There’s the obvious ongoing context of little to no transit through the Strait. Last week, the US Administration also rejected Iran’s proposal to allow the Strait to re-open, in exchange for the US agreeing to defer the thornier “nuclear issue”. President Trump was briefed on options for another round of “short but powerful” strikes on Iran, essentially aimed at getting them back to the negotiation table.
The UAE announced that it is leaving OPEC, which in theory is a negative for energy prices - it implies a major producer will no longer be bound by quotas. But this news didn’t really have a lasting impact.
Late last week Iran submitted a second revised proposal to the US, but reports suggest it failed to satisfy Washington.
The latest development came early Monday with the launch of “Project Freedom”, under which the US will begin “guiding” neutral ships trapped in the Gulf. While framed in humanitarian terms, the scale of the operation suggests otherwise: CENTCOM flagged the involvement of guided‑missile destroyers, over 100 aircraft, unmanned platforms, and some 15,000 personnel. Iran’s initial response has been wary, viewing the move as a breach of ceasefire terms.
A week of hawkish central banks
A bunch of key central banks met last week too – the Fed, BoJ, ECB and BoE - and the broad message was a hawkish one. They all left policy steady, but the messaging was focused on leaning against inflation risks.
The record of the BoJ meeting showed a 6-3 vote to keep policy on hold, a little more hawkishly divided than the usual 7-2 vote. The meeting also showed that the debate is inching closer towards timing, rather than direction, and higher confidence in inflation persistence.
Still in Tokyo, the other big news story was MoF/BoJ FX intervention to prop up JPY last week. Japan's Vice Minister for International Affairs Mimura issued a very loaded warning to markets late last week, "This is our final advisory..."
This rhetoric landed with a potency we haven't yet seen and several hours later the BoJ/MoF were reportedly conducting JPY buying operations. The first wave on Thursday evening was reportedly close to USD30bn, with additional rounds reportedly conducted Friday afternoon and again today. Intervention has mostly been about the pace of JPY declines, but in recent weeks JPY has been fairly rangebound (158-160), meaning it really is about levels, in this case 160 in the line in the sand. Officials in Tokyo can claim some success at this point - USD/JPY is trading in the 156-157 area, from 160.0+ in the hours before intervention.
Chair Powell’s last meeting as Fed Chair was unexpectedly hawkish too. Three regional Presidents dissented against the statement’s easing bias. Some Fed watchers were initially puzzled by this dissent. The Fed’s statement for the most part reads pretty two-sided and balanced. But it turns out the line, “additional adjustments” has essentially coded the obvious lean toward cuts for a while - since the Fed after all cut rates last year.
The ECB meeting landed hawkish too, and a bunch of commentators firmed their forecasts for a June ECB hike.
Q1 local CPI was a bit of a “fizzer” for local markets. Headline CPI rose 1.4% in the quarter, right in line with expectations, while the trimmed mean measure rose 0.8% q/q, below consensus at 0.9%. To be fair this Q1 print only really captured the early impacts of the war - recall hostilities started 28 Feb. The really big hit is more of a Q2 story and there has been widespread reporting in the media of energy cost pass through in a wide range of industries and sectors beyond the immediate obvious industries like freight and airfares.
Risk assets hit new all time highs last week. Markets are all in on the AI story once again, fuelled by optimistic tech earnings reports last week. The S&P500 is up virtually 10% over the last month (NASDAQ 14.7%, NIKKEI 11.4%). While consequential Iran developments are only ever just a headline away, equities are clearly treating this as a "mangeable risk" at this point. We'll see if that's sustainable.
A dense calendar ahead: RBA and US payrolls
The week ahead is dense with important data and event risk, including the RBA and US payrolls.
+19bp is priced for this RBA meeting. RBA officials have been consistently hawkish in their messaging so we and markets go into this meeting with pretty high conviction levels. All the signals will be in the detail. A unanimous Board vote with a strident inflation-focused message would be the most AUD-constructive outcome (only an additional +8bp is priced for June). But, the base case is surely for another divided vote.
This meeting includes the Statement on Monetary Policy with updated forecasts - we’ll obviously be putting a lot of attention on the RBA’s trimmed mean CPI projections - currently 3.2% ann by end-2026 and 2.7% ann by end-2027.
US April payrolls are on tap this week too. Going into this print US rates are at key levels: US 2yr bond yields are near 4%, 10yr yields are near 4.5%, while 30yr yields are near 5%, all significant thresholds.
A decent US payrolls, coming after last week’s strong ISM prices paid, 3 hawkish Fed dissents, high energy prices, and the renewed prospect of 25% tariffs on European cars, opens a pathway to even higher yields. This would see markets starting to speculate on the possibility Fed dropping their easing bias altogether at the June (Warsh) meeting. This could upset AUD momentum. But equally, a soft Apr US payrolls would avert this story. It really is a crap shoot. US payrolls have been all over the map in the last six months – printing as soft as -150k a couple months, and as strong as +178k.
Monday
- Holidays in UK, Japan (1-6 May) and China (1-5) - markets closed.
- Eurozone Apr S&P Global Manf. PMI (Final)
- Fedspeak; Williams
- US Mar Factory Orders
Tuesday
- RBA Policy Rate Decision
- Australia Apr S&P Global Services PMI (Final), Mar Household Spending
- US Apr S&P Global Services PMI, ISM Services, Mar Trade Bal., JOLTS Job Openings
- Fedspeak; Bowman, Barr
Wednesday
- China Apr RatingDog Services PMI
- Eurozone Apr S&P Global Services PMI (Final), Mar PPI
- UK Apr S&P Global Services PMI (Final)
- US Apr ADP employment,
- Fedspeak; Musalem, Goolsbee
Thursday
- Australia Mar Trade Balance
- UK Local Elections
- Fedspeak; Williams, Hammack, Kashkari
Friday
- Japan S&P Global Services PMI (Final)
- ECB's President Lagarde speaks
- BoE's Gov. Bailey speaks
- US Apr Nonfarm Payrolls, May Uni. of Michigan (Prelim.)
- Fedspeak; Bowman, Waller, Daly, Goolsbee, Cook
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