Australian dollar: caught between resilience and resistance
The Australian dollar starts the week parked just below 0.7000. Several attempts to settle back above 0.70 last week were met with resistance. Softer-than-expected US inflation initially supported risk assets and lifted the Australian dollar, but enthusiasm faded as the US-Iran conflict escalated and the sell off in technology stocks accelerated. This week is pretty thin in terms of data and event risk beyond local June labour force figures. The fate of AI/semiconductors and the escalating war will be more impactful.
Australian dollar: caught between resilience and resistance
The Australian dollar starts the week parked just below 0.7000. Several attempts to settle back above 0.70 last week were met with resistance. Softer-than-expected US inflation initially supported risk assets and lifted the Australian dollar, but enthusiasm faded as the US-Iran conflict escalated and the sell off in technology stocks accelerated.
This week is pretty thin in terms of data and event risk beyond local June labour force figures. The fate of AI/semiconductors and the escalating war will be more impactful.
Middle East tensions return to centre stage
Financial markets initially coped well with the resumption of US-Iran hostilities. Investors largely assumed fighting would remain contained, negotiations would continue behind the scenes and critical energy infrastructure would be spared. Call this "tit-for-tat".
But this all broke down over the weekend. Iran announced it will no longer be adhering to the Memorandum of Understanding (MOU) and both parties have now formally walked away. Markets now have to think about attrition/duration as a framework again. Shipping through the Strait has stalled and attacks on both sides have expanded to bridges, utilities and ports.
Crude has jumped higher another +2% this morning, taking front-month Brent back up to US$90/bbl (+16% since last Monday). We are not yet back to the open ended full-scale military conflict that characterised March and April, but the risks are certainly building.
And yet, while the Australian dollar has been unable to sustainbly retake 0.70, and traded heavy late last week, it's still holding to a low-key and unremarkable uptrend so far in July - ≈ +US1 cent.
Front-month Brent has jumped back up to US$90/bbl, up more than +16% since last Monday. An important development has been the performance of refined and finished fuels. While crude oil prices have risen sharply, products such as diesel have increased even more. This suggests supply disruptions are increasingly being felt further along the supply chain, which could complicate the inflation outlook facing central banks.
US June inflation provides some relief
US June CPI and PPI printed softer than expected (-0.4% and -0.3% respectively) in line with the steep drop in energy prices. Strikingly, the core CPI was flat over the month and super core (services CPI less shelter) actually posted a decline. Audible relief was heard across rates markets and near-term Fed hike expectations were swiftly downsized. The first full hike was pushed from Sep to Dec.
This provided much needed relief for currencies and other risk assets. The Australian dollar bounced to a 3-week high (0.7021) after threatening the 0.69-handle a mere 24-hours before the print.
However, Fed Chair Warsh's testimony in front of Congress not long after, communicated that the reassuring June CPI was "not mission accomplished" and that the Fed has "no tolerance for persistently high inflation". Vice Chair Jefferson reinforced this on Thursday stating that the Fed would consider raising rates if inflation doesn't cool. Regional Fed presidents were amplifying the hawkish messaging Thursday, Friday too.
While markets still expect a Fed hold at their July 28 meeting, hawkish messaging from several Fed members keeps hikes a live possibility down the line. Fed hike pricing conveys a similar messaging: near-term meeting expectations have been downgraded, but further out, there's still +40bp priced to the Fed's March 2027 meeting (not greatly different than pre-CPI).
China's growth picture remains mixed
Westpac Consumer and NAB Business Confidence surveys both rebounded in July on the initial signing of the US-Iran MOU and subsequent pullback in energy costs, however these indices remain at the lower end of historical averages (at 83.9, the Westpac surveyis still in the bottom 10% of results over the 50-year history of the survey). This suggests that businesses and consumers remain under pressure, and sentiment will remain heavily dependent on the US-Iran outlook.
China Q2 GDP printed the weakest in more than 3 years at 4.3% y/y. While June industrial production and retail sales beat expectations, this was outweighed by the drop in fixed-asset investment proving that domestic demand remains strained. This has boosted expectations of PBOC stimulus measures at the July Politburo meeting.
Following concerns of a weakening JPY, on Friday Japan's PM Takaichi reinforced the importance of seeking greater investment in JGBs from domestic investors including the Government Pension Investment Fund (GPIF). Despite this combined with recent intervention warnings and a weaker US CPI, USD/JPY is still within an uptrend.
AUD/JPY received a sharp boost following US CPI, climbing +1% over the week and is trading near 113.57 on Monday afternoon.
AUD/NZD bounced slightly on US inflation data, however a relatively more hawkish RBNZ has led the cross lower in recent weeks - down -0.7% over the week and trading near 1.1939. This cross has managed to find support in the low 1.19s recently.
AUD/EUR has posted a decent recovery from its June lows (0.6020). The pair traded choppily last week through soft US inflation and the US-Iran MOU breakdown, however the cross has found support around the 0.6090 level.
What markets are watching this week
The week ahead calendar is pretty thin data wise aside from local June jobs data (Thur). This data point has some potential to shape August RBA meeting expectations.
Westpac expects a +15k employment lift, a steady participation rate (66.7%) and the unemployment rate holding at 4.4% - noting that forward-looking business survey measures are increasingly pointing to sluggish employment growth ahead.
Local June jobs has some potential to rebuild August RBA pricing - currently +5bp priced - but an on consensus print will be met with a shrug. We really need to see the unemployment rate move at least +/- 0.1ppt to even generate a small repricing. Next week's June CPI will be decisive.
The calendar has a heavier UK focus. Andrew Burnham will be entering Downing street unchallenged as the next UK PM. The calendar also includes UK June CPI and ILO May employment data.
A sizeable pullback in AI and semis have officially put them in bear market territory. That puts even more intense focus on scheduled hyperscaler Q2 earnings this week (Intel and Google).
The risks to the AI valuations continue to build with China's Moonshot releasing Kimi K3 on Friday. This could be another Deepseek moment - a cheap and very cost efficient China AI model.
The ECB meets this week but policy expectations are low, though Lagarde should continue to strike a hawkish tone.
Monday
- Andy Burnham to be sworn in as UK's Prime Minister
Tuesday
- NZ Q2 CPI
- UK May Labour Data
Wednesday
- Australia Jun Westpac Monthy Leading Index
- UK Jun CPI
- Google Q2 Earnings
Thursday
- Australia Jun Labour Data
- ECB Policy Rate Decision
- US Chicago Fed activity
- Intel Q2 Earnings
Friday
- Australia, Japan, Eurozone, UK & US Jul S&P Global PMI (Prelim.)
- Japan CPI
- Section 122 US 10% import tariff to expire.
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