Rates Rout Rattles the Australian Dollar
The Australian dollar was coasting above 0.7200+ for much of last week but a bruising end to that week and a soft start Monday have seen it give back the best part of US1.4c from last week’s highs, to 0.7130. The global bond sell‑off is now clearly bleeding into risk assets, and the Australian dollar heads into a busy week with plenty to digest - US‑Iran headlines, the FOMC minutes, and flash May PMIs. Locally, focus falls on May consumer sentiment and the RBA minutes on Tuesday, followed by April labour force data on Thursday.
Rates Rout Rattles the Australian Dollar
The Australian dollar was coasting above 0.7200+ for much of last week but a bruising end to that week and a soft start Monday have seen it give back the best part of US1.4c from last week’s highs, to 0.7130. The global bond sell‑off is now clearly bleeding into risk assets, and the Australian dollar heads into a busy week with plenty to digest - US‑Iran headlines, the FOMC minutes, and flash May PMIs. Locally, focus falls on May consumer sentiment and the RBA minutes on Tuesday, followed by April labour force data on Thursday.
The Australian dollar has effectively completed a full round trip in May. We started the month just above 0.7100, rallied to 0.7278 (6 May), and then spent the bulk of the following week above 0.7200, before it all unravelled late last week.
The early‑May backdrop was about as clean as it gets for the risk sensitive Australian dollar - AI‑driven global "risk-on" optimism, global equities pushing to fresh highs, base metals breaking out and a degree of ceasefire optimism holding up sentiment. That environment has shifted decisively.
Rates Sell-off Starts to Bite
The move higher in global yields has turned problematic for risk, and it is now extracting a clear toll. Sovereign bond markets are breaking higher across the board. US Treasuries, UK gilts and Japanese government bonds are all pushing to multi‑month or multi‑decade yield highs simultaneously.
The UK move has a political overlay, with a renewed fiscal risk premium creeping in after Labour’s weak local election showing recently, but more broadly this is about inflation and central bank repricing.
Inflation and Policy Repricing Drive the Move
Recent data has reinforced the shift. US April CPI and PPI both surprised on the firm side last week, while Japan’s April PPI posted the strongest monthly increase in over a decade. The first‑round energy shock is evidently feeding through more forcefully than expected, and markets are adjusting accordingly.
Front‑end pricing has moved with Dec‑2026 Fed OIS now discounting around 20bp of Fed hikes and June‑2027 closer to 34bp.
This has pushed front end markets to price in the prospect of Fed rate hikes. Dec 2026 Fed OIS is priced at about +20bp, i.e. an 80% chance of a +25bp hike. June 2027 Fed OIS is priced at +34bp, meaning almost 1 ½ 25bp hikes are priced.
That repricing has pushed US 10yr yields up toward 4.6%, 15mth highs, while the 30yr is retesting the 5.1% area. UK gilts are similarly elevated, with 10yr yields at multi‑decade highs and the long end pushing even further extremes. Japan is no exception - 10yr JGB yields are at multi‑decade highs, while the 30yr continues to print all-time cycle highs. The key point is that this is no longer isolated; global bond markets are feeding off one another, and the spillover into risk assets is becoming more pronounced.
Geopolitics Add to the Fragility
Geopolitics are not helping. Trump’s remark last week that Hormuz may not need to reopen “at all”, combined with weekend reporting that US and Iran remain far apart, challenges the relatively optimistic resolution timeline that had been priced into risk markets. What was framed as a near‑term resolution risk is starting to drift into something more open‑ended.
At the same time, last week’s US‑China engagement delivered little beyond incremental progress - some movement on chips, tariffs and purchases, but nothing that meaningfully shifts the strategic backdrop. The read is one of managed coexistence rather than any durable improvement.
There was some hope that China could be co-opted into the US-Iran resolution framework too. But we saw little on this front. Instead, an emboldened China called out the Taiwan issue, with media reporting the following quote from Xi to Trump, “The Taiwan question is the most important issue in China-US relations”. If not “handled properly”, there will be “clashes and even conflicts, putting the entire relationship in great jeopardy”.
AUD - Reset or a Breakdown?
The pullback in the Australian dollar late last week does not constitute a meaningful structural break, but it does mark a meaningful reset of its short-term parameters. 0.7100-0.7110 is the operative short term support floor many are watching. A break of that will have many then eyeing 0.7000. 0.7200 has obviously shifted from a support area to resistance.
The Australian dollar crosses have traced out similar profiles in May. AUD/EUR touched a new cycle high at 0.6207 early last week, but it is back to 0.6135. BoJ intervention has made AUD/JPY messy and noisy, but it too has overall weakened from its best levels, to the mid-113s.
The Federal Government handed down one of the more impactful budgets in recent years, but there was little for the Australian dollar to sink its teeth into. The really far-reaching changes for the NDIS, the treatment of capital gains and negative gearing won't impact the economy for a while.
Equities took a tumble on Friday with the S&P500 down 1.2% intraday following the sharp sell off in bonds. The lack of discussion around a US-Iran resolution between Trump and Xi last week seemed to further squash hopes of the Strait reopening soon.
Oil traded higher into Friday's close with WTI closing above $105/bbl and Brent above $109/bbl. US SPR releases, the use of Venezuelan crude and sales of seaborne Russian oil have placated prices for a while, however time is running out.
The US allowed the sanctions waiver on Russian oil sales to expire, despite supply remaining tight. A big mitigator has also been China reducing their demand for crude to reduce competition for barrels but again there is a limit to which they can keep reducing their demand. The latest Australian Minimum Stock Holdings data show we had 44 days of gasoline, 35 days of jet kerosene and 36 days of diesel as of last Tuesday.
Metals also took a decent hit - aluminium and copper fell more than 2.5% on Friday after hitting new multi-month highs mid-week at $3690/t and $14196.50/t respectively.
Busy week ahead...
There are a lot of risks for the Australian dollar to navigate this week.
There’s the FOMC minutes (Wed), the risk being "many" or "most" favour ditching the implicit easing bias for more neutral guidance, up from "some" in March and "several" in January. Kevin Warsh officially takes over Monday.
There's plenty on the AUD-leg too. May consumer sentiment & RBA minutes (Tue) and Apr jobs (Thur).
Fuel prices are off their highs, a consideration for consumer sentiment. But there’s also Federal Budget and the pre- and post-budget survey responses will be scrutinised.
Australian April labour force data will be at the forefront of local calendars. The consensus forecast is for +15k jobs and a steady unemployment rate (4.3%). The NAB business survey and ANZ job ads have softened over the last few months but this rarely lines up month to month with employment. The jobs report feels potentially asymmetric for local rates and the Australian dollar - a solid read changes little, but a weak one feeds the "RBA hawkishness has peaked" narrative. Let's see. The RBA is of course prioritising inflation risks right now.
We will receive the RBA May policy meeting minutes which could read as more measured, signalling a pause on hikes in June. Markets price +40bp of hikes for the remainder of 2026. RBA Assistant Gov. Sarah Hunter also speaks this week in Sydney.
NVIDIA Q1 earnings on Wednesday will be closely watched as well. There's a lot riding on this given the AI earnings optimism priced into markets in recent weeks.
Tuesday
- RBA May Policy Meeting Minutes
- Australia May Westpac Consumer Conf.
- RBA Assist. Gov Sarah Hunter speaks
- Fedspeak; Paulson, Waller
- G7 Finance Ministers & Central Bankers (Paris)
Wednesday
- UK Apr CPI
- Eurozone Apr CPI (Final)
- FOMC April Policy Meeting Minutes
- NVIDIA Q1 Earnings Report
- Fedspeak; Barr
Thursday
- Australia Apr Employment Data, May Consumer Inflation Exp.
- Australia, Japan, Eurozone, UK & US May S&P Global PMI (Prelim.)
- US May Philadelphia Fed Business outlook
Friday
- Japan Apr National CPI
- US May Uni. of Michigan Survey (Final)
- Fedspeak; Waller
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