Local jobs & US yields hit Australian dollar, Iran deal optimism holds the line
The Australian dollar was threatening a sustained break below 0.7100 last week but US-Iran deal optimism kept risk appetite afloat. US officials are touting progress again to start the week, which is helping the Australian dollar trade higher, up to 0.7170. At the same time, the Australian dollar’s bullish credentials have taken a hit. A weak April labour force and a hawkish repricing in Fed expectations have compressed the Australian dollar’s yield supports. This week's monthly April CPI (Wed) should re-centre attention back on the RBA's inflation priorities. Q1 construction work done (Wed) and CAPEX (Thu), alongside April household spending (Thu) will provide a temperature check on the economy’s momentum into and around the energy price shock.
Local jobs & US yields hit Australian dollar, Iran deal optimism holds the line
The Australian dollar was threatening a sustained break below 0.7100 last week but US-Iran deal optimism kept risk appetite afloat. US officials are touting progress again to start the week, which is helping the Australian dollar trade higher, up to 0.7170. At the same time, the Australian dollar’s bullish credentials have taken a hit. A weak April labour force and a hawkish repricing in Fed expectations have compressed the Australian dollar’s yield supports. This week's monthly April CPI (Wed) should re-centre attention back on the RBA's inflation priorities. Q1 construction work done (Wed) and CAPEX (Thu), alongside April household spending (Thu) will provide a temperature check on the economy’s momentum into and around the energy price shock.
The Australian dollar spent the better part of the first two weeks of May exploring 0.7200+. But surging US yields and a soft local April labour force shifted ranges lower last week: 0.7080-0.7180.
The lows for the week traded on Tuesday (0.7080), coinciding with US bond yields hitting multi-month and multi-year highs across the curve. US30yr yields touched 5.20%, their highest in 17 years, while 10yr yields touched 4.685%, 3yr highs.
US-Iran deal hopes support sentiment, outcome still pending
At the same time, President Trump repeatedly leaned into deal optimism, suggesting an agreement is in its final stages. Markets, however, have grown more selective with these headlines - reassured by the "process" (ongoing dialogue, active mediation), but still waiting on a tangible "outcome".
Weekend US-Iran reporting was mixed, but it does paint a more substantive deal architecture taking shape than previously.
A two-phase deal appears to be forming - an immediate 60 day ceasefire window, including a reopening of the Strait (clearing mines, ensuring safe passage) and the US lifting its naval blockade on Iranian shipping/ports - allowing Iran to resume oil exports.
“Phase-two” centres on negotiations around limiting and removing Iran’s enriched uranium stockpile, lifting sanctions and unfreezing Iranian assets.
Key uncertainties remain - particularly around Iran’s “tolling rights” and the wider regional conflict (Israel/Lebanon).
This has been enough to give markets a fresh burst of optimism. The Australian dollar gapped +0.4% at the Asia-Pacific Monday open and has ground its way back towards last week’s ceiling, at 0.7170. US equity futures are 0.90% higher and dated Brent crude is down almost 6% to $97.80/bbl.
Still, for the Australian dollar to sustain a move back above 0.7200 and beyond, something more concrete is required - say a signed framework and formal confirmation of a Hormuz reopening. A breakdown in talks would quickly reverse recent gains.
Australian dollar squeezed by yields, held up by risk
Moderating RBA tightening expectations and a soft April local jobs report were big talking points last week too. This produced a good amount of yield spread compression, which has done real damage to the Australian dollar’s bullish credentials.
The AU-US 10yr bond spread fell to ~37bp versus ~70bp+ just four weeks ago. The compression is coming through on both sides of the equation.
Three RBA hikes this year and an energy supply shock have some wondering if the RBA might be on the cusp of a longer pause. Then there's the Federal Budget, which has cooled property market sentiment. To cap it off, a weak April labour force update last week saw the August RBA meeting repriced to +12.5bp, from +19bp.
Employment fell 19k in April, against expectations for a 15k gain. ‘Abnormal’ seasonality associated with the timing of Easter would have exaggerated the weakness, so we should brace for a rebound next month. At the same time, the weakness isn’t fully explainable by this quirk. The unemployment rate also rose a lot more than expected, to 4.5%, from 4.3%.
On the US side, relatively resilient activity data, stronger inflation prints and hawkish Fed-speak have all conspired, resulting in a material repricing in Fed expectations. A full Fed hike is now priced by year’s end and markets are bracing for a hawkish outing when newly installed Fed Chair Warsh presides over his first FOMC mid-June.
Influential Fed Governor Waller added to the hawkish Fed chorus Friday too, seeing a rate cut now as no more likely than a hike.
Despite the modest resetting of RBA expectations, the Australian dollar’s key cross rates are still hanging in there. US-Iran deal optimism and healthy global risk appetite conditions are evidently doing the hard work keeping AUD-crosses aloft.
Other than AUD/GBP, most of the key AUD-crosses are less than 1% or so from their recent peaks in early May. AUD/EUR is holding mostly to a 0.6100-0.6150 range, AUD/NZD is holding above 1.2100, while AUD/JPY is still at lofty levels – 113.90.
Oil stabilises, equities rally
Equities started the week off on shaky ground amid the rally in bond yields, however risk sentiment recovered over the week in line with stronger NVIDIA Q1 earnings and lingering hopes around US-Iran developments; S&P500 up 0.88%, Dow Jones up 2.13% and Nikkei up 7.5% over last 5 days.
US 10yr bond yields reached highs not seen since Jan 2025 at 4.69% mid-week, but ticked lower into Friday closing at 4.55%.
Oil markets tracked in a similar fashion; Brent and WTI started the week at higher levels - above USD$112/bbl and USD$105/bbl. News of ongoing US-Iran talks however combined with recovery in equities saw prices drop sharply; WTI fell -15% and Brent -11.5% over the last 5 days, probing near 1-month lows.
Gold continued to probe $4,500, with more hawkish leaning comments from the Fed's Waller and news that Russia has continued selling gold, weighing on prices. State reserves were down 200k oz in April and 900k oz since the start of the year.
Local calendar pivots to April CPI
This week's local calendar is headlined by April CPI (Wed) and Q1 GDP partials - construction work done and private CAPEX.
The April CPI should re-centre the market's reading back on the RBA's inflation priorities. Markets will of course be watching closely for any signs of broader pass-through from higher fuel costs. Consensus expects a 0.3% m/m trimmed mean.
Q1 CAPEX will include surging data centre construction and the fit-out.
The RBNZ meets this week, with markets expecting rates to remain on hold. That said, this should be a lively RBNZ meeting and it might come down to a formal vote on policy.
The US April PCE is on tap too, alongside Fedspeak and a raft of US soft surveys.
US, UK and Japan markets are shut Monday for holidays.
Monday
- US, Japan & UK holidays; markets closed
Tuesday
- US May Conference Board Consumer Confidence
Wednesday
- Australia Apr CPI, Westpac Leading Index, Q1 Construction Work Done
- China Apr Industrial Profits
- RBA Board member Hewson speaks
- RBNZ Policy Rate Meeting
- Fedspeak; Kashkari, Logan and Cook
Thursday
- Australia Q1 Private CAPEX, Apr Household Spending
- US Apr PCE, Personal Income & Spending, Durable Goods (Prelim.)
- Fedspeak; Williams, Jefferson, Goolsbee and Barkin
Friday
- Japan May Tokyo CPI
- Australia Apr Private Sector Credit
- US May MNI Chicago PMI
- Fedspeak; Bowman, Schmid and Paulson
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