Australian dollar gets comfortable on the 0.72-handle
The Australian dollar pushed to fresh four‑year highs last week, topping out at USD 0.7278, as another wave of optimism around the US-Iran war took hold. The RBA effectively signalled a pause when they hiked last week and US April payrolls beat expectations, but neither proved a drag. Nor has the US rejection of Iran’s counter‑offer at the start of this week. The Australian dollar is beginning to develop a degree of familiarity at these higher levels just above 0.72. The week ahead is busy and important, featuring the Federal Budget, Q1 Wage Price Index and US April CPI. Markets will also closely monitor the Trump–Xi summit in Beijing.
Australian dollar gets comfortable on the 0.72-handle
The Australian dollar pushed to fresh four‑year highs last week, topping out at USD 0.7278, as another wave of optimism around the US-Iran war took hold. The RBA effectively signalled a pause when they hiked last week and US April payrolls beat expectations, but neither proved a drag. Nor has the US rejection of Iran’s counter‑offer at the start of this week. The Australian dollar is beginning to develop a degree of familiarity at these higher levels just above 0.72. The week ahead is busy and important, featuring the Federal Budget, Q1 Wage Price Index and US April CPI. Markets will also closely monitor the Trump–Xi summit in Beijing.
US-Iran last week: Escalation, Confrontation, Love Taps & Peace Hopes
The US Administration pivoted with breathtaking speed last week. As of Monday, the US was pressing ahead with a “provocative” new initiative - Project Freedom - aimed at guiding hundreds of stranded “neutral” commercial vessels through the Strait. The fragile ceasefire appeared at risk of coming undone.
But within 48 hours this initiative was shelved. Key US officials said that “offensive operations are over” and the US delivered a fresh one-page draft peace proposal to Iran - a Memorandum of Understanding (MOU) reportedly including key concessions.
So in several days the US swung from a maximalist posture, to a more pragmatic and concessional stance. Things then turned murky mid-week, with the two sides sporadically engaging each other militarily in contested waters. The US insisted that the ceasefire is still in force, and President Trump characterised these engagements as ‘love taps”.
The Australian dollar responded exactly as any risk sensitive asset would to these twist and turns - weakening in the early past of the week from just above 0.7200 to a low of 0.7136, before rebounding with force and hitting new 4-year highs at 0.7276 as the MOU boosted hopes for the reopening of the Strait.
But there is some subtle nuance to note here. Directionally the Australian dollar and risk assets in general continue to surf in line with the headlines - rising on headlines that point to resolution and declining on setbacks. But the size of the swings are increasingly asymmetric.
Pullbacks in the Australian dollar on negative headlines are getting smaller, and the rebounds on good news are getting bigger. Physical spot and dated front month crude futures of course price ongoing disruption, but risky assets are leaning into a resolution of sorts. Risk assets are in no mood to reprice some of the uglier scenarios - they are pricing the uncertainty as “manageable” and escalatory rhetoric as posturing, not a harbinger of genuine breakdown. Back-channels remain open. Throw in a renewed burst of AI earnings optimism in recent weeks and the "risk-on" atmospherics for global markets become self-reinforcing.
This morning’s quick rebound in the Australian dollar after President Trump called Iran’s response “totally unacceptable” (to the US’ peace proposal) is a case in point.
AUD crosses: the RBA no longer the lone hawk
It’s a slightly more nuanced picture for the Australian dollar crosses. The RBA dialled back their ‘front-footedness” with Gov. Bullock talking about having “space” when they hiked rates last week. Against that Norway’s Norges Bank unexpectedly hiked rates last week, the BoJ is intervening to support their currency and rates markets are locking down their bets for earlier RBNZ hikes. The RBA isn’t quite the lone hawkish outlier anymore.
AUD/JPY: intervention disrupts the trend
Repeated bouts of BoJ intervention during Japan’s Golden Week holiday have interrupted AUD/JPY’s bullish momentum. Reports suggest that the BoJ may have spent USD35bn or so pushing USD/JPY lower in their first intervention round 30 April. We and other commentators think they may have intervened another three times since then. The total intervention sum is now reportedly around USD50-65bn. Tokyo officials are of course fighting a challenging macro backdrop for JPY. Japan is on the wrong side of the energy terms of trade shock, real interest rates in Japan remain negative and global investors are wary about PM Takaichi’s reflationary fiscal policy agenda.
But intervention has nevertheless altered the short term yen-calculus. USD/JPY was cycling around 158-160 in March/April and threatening to break higher. It is now cycling between 156-158 for the most part. AUD/JPY is off its 114.70 multi decade highs from late April. At the height of the BoJ’s first round of intervention AUD/JPY traded as low as JPY111.33. The AUD/JPY cross is currently cycling around the 113-114 area.
AUD/NZD: momentum stalls
AUD/NZD is struggling to extend gains above 1.22 and is now range‑bound between roughly 1.2100 and 1.2200, breaking the persistent uptrend seen earlier this year.
Two factors are at play. The RBA’s near‑unanimous hike came with more cautious guidance, lifting the bar for a fourth consecutive increase in June. Markets assign only around a 20% chance to another hike next month.
In contrast, expectations in New Zealand have shifted decisively towards an earlier resumption of tightening, with markets fully pricing a rate hike by early July.
China remains a key AUD support
China‑related signals continue to land constructively for the Australian dollar. The yuan remains a regional anchor, with the PBoC guiding a steady appreciation path. April trade data showed resilience, with exports up around 10% y/y and imports running above 20% y/y.
Iron ore prices, long range‑bound between USD 95-109/t, have broken higher towards USD 112/t - another tailwind for AUD.
Global markets, oil and rates
US equities hit new all-time highs last week with the S&P500 touching 7400 (+7.25% YTD) on hopes of a US-Iran ceasefire/agreement. However Trump's comments that Iran's peace proposal was "unacceptable" has seen APAC equities backtracking (Nikkei is down -0.3% today). US 10yr yields also hit new YTD highs last Monday at 4.44%, but managed to close the week lower near 4.38%.
US April payrolls were stronger than expected at 115k payrolls. But the detail was softer, including higher underemployment, slower earnings growth and the alternative household survey of employment showed a decline in employment. This was a "good but far from great" report, largely consolidating the view that the Fed is on hold for the foreseeable future (0bp priced for end-2026).
Brent and WTI crude prices followed en suite, finishing the week slightly lower at circa USD$101bbl & USD$95/bbl respectively. However, Trump's rejection of Iran's peace proposal fuelled a sharp >4% rally in Brent and WTI on Monday. Global oil inventories have also dropped to 8-year lows with an estimate 600mn barrels lost to the war since March, and are not a finite buffer in absorbing the impact of this shock.
The week ahead: Budget, US CPI and geopolitics
Local calendars this week look towards Australia's 2026-27 Federal Budget, the Q1 wage price index, April NAB business survey and May consumer inflation expectations. Globally, Presidents' Trump and Xi meet this week in China (13th-15th May), US April CPI is due and Powell wraps up his term as Fed Chair - potentially staying on as a Governor until 2028.
Markets expect a complex budget featuring restraint on NDIS spending, higher defence investment, productivity reforms and possible housing‑related tax adjustments. PM Albanese pre-announced last week that there will be a AUD$10bn fuel package, increasing national reserves by 10 days. Housing tax changes are also considered very likely, alongside adjustments to the concessions on capital gains taxes.
Presidents Trump and Xi are scheduled to hold a Summit in Beijing on Thursday and Friday. This is not expected to produce any pathbreaking strategic bargain. Last year’s tariff war and rivalry around US chip access and China’s rare earth chokehold has settled into uneasy "strategic accommodation".
That said, these events are highly stage managed and choreographed. The optics demand at least some modest risk-friendly "deliverables" in these disputed areas. This would be well received by China-centric currencies.
The Iran war will of course feature too, as will talks around Taiwan and agriculture purchases.
Tuesday
- Australia Apr NAB Business Confidence
- Australia 2026 Government Budget released
- US Apr CPI, NFIB Small Business Optimism
- Fedspeak; Williams, Goolsbee
Wednesday
- Australia Q1 Wage Price Index
- US Apr PPI
- Fedspeak; Kashkari, Collins
Thursday
- Australia May MI Consumer Inflation Exp.
- UK Q1 GDP (Prelim.)
- US Apr Retail Sales
- Trump-Xi meeting in China (13th-15th May)
- Fedspeak; Williams, Barr, Hammack, Schmid
Friday
- US May Empire Manf. Survey
- Jerome Powell's term as Fed Chair ends.
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