Australian Dollar: Higher Despite Strong US Data
The Australian dollar finished another week on the front foot, closing on the 0.72-handle for the first time since early May. While a stronger than expected US jobs report briefly supported the US dollar Friday night, most of that move quickly faded. The week ahead brings several RBA speaking engagements, local sentiment surveys and important US inflation data that will decide whether the Fed hikes rates 16 Sep.
Australian Dollar: Higher Despite Strong US Data
The Australian dollar finished another week on the front foot, closing on the 0.72-handle for the first time since early May. While a stronger than expected US jobs report briefly supported the US dollar Friday night, most of that move quickly faded. The week ahead brings several RBA speaking engagements, local sentiment surveys and important US inflation data that will decide whether the Fed hikes rates 16 Sep.
A mid-week wobble before a late rebound
The Australian dollar did not have things all its own way last week. After starting the week near US0.7160, it slipped to a low of US0.7120 mid-week before rebounding into Friday's close. The pull-back tested the lower edge of the upward trend that has been in place since late June.
Fed debate drives market swings
This pullback was part of a wider continuation move linked to Fed Chair Warsh's earlier hawkish Jackson Hole speech, Friday 28 August, where he said, "...we must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do". Fed Chair Warsh steadied the Fed-credibility ship, and delivered everything but the explicit rate hike signal itself.
Enter influential and centrist Fed Governor Waller. While conceding that inflation remains well above target he overall struck a more encouraging and softer tone, noting that recent trends “suggest we are finally seeing some signs of disinflation.” Importantly, he also unpacked his personal reaction function, saying that, “If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.” Governor Waller invoked John Lennon (1969), “Give disinflation a chance. We can wait one meeting!”
Whereas Chair Warsh's Jackson Hole speech had markets believing persistent failure to hit target is what matters, reducing the importance of any single data point, Waller reframed the 16 Sep FOMC to be a more two-sided risk and heavily contingent on this week's Aug CPI data. Waller also took direct aim at his bosses characterisation that the underlying US inflation impulse has not meaningfully improved, noting that that the latest 3mth annualised pace represents "considerable improvement, and the speed of this downward trajectory is encouraging”.
Waller also mused that certain non-market services prices are estimated rather than observed and this could be pushing the inflation numbers higher, while upcoming revisions to the way the Bureau of Economic Analysis computes the PCE price deflator are expected to take inflation readings lower. 16 Sep Fed hike expectations slipped accordingly, and the Australian dollar jumped back towards 0.7200.
Japan adds another source of support
Chris Waller's less hawkish comments accounted for the bulk of the Australian Dollar's turnaround midweek, but there were other important catalysts too. Also helping the Australian dollar higher last week: an impulsive rally in JPY.
USD/JPY had a very spicy move lower, from above 160.00 to 155.35, Wed-Thur, re-testing its late-April and late-July intervention lows. hawkish Bank of Japan Board Member Takata opened the door to open larger and back-to-back hikes. A 0.25% hike “is not necessarily set in stone. I can’t say at this stage whether it is 0.5 or 0.75, but as I have been repeating, the environment has changed.” Generally speaking, back-to-back rate hikes would be a possibility, too, Takata added.
That, and reports that Japan's Government Pension Fund (GPIF) - one of the world's largest asset managers with US2trn in assets - held an unusual asset allocation board meeting in August all prompted a sharp rally in JPY. They have been under heavy pressure from the Takaichi Govt to trim their holdings of foreign bonds, and redirect their investments towards Japan's JGB bond market.
Strong US jobs data fails to lift the US dollar
August US payrolls blew past all expectations, with a +162k gain, including upwards revisions that wiped July's jobs decline from the ledger (-25k to +21k). The 3mth moving average pace to August looks a more palatable now, at +71k, vs +20k pre-revisions to July. The household survey, separate to the non-farm establishment payrolls report also showed a gain, +569k, after contracting for most of 2026.
But the most eye-catching part of Friday's jobs data: employment in the goods sector, i.e. manufacturing & construction is picking up pace more consistently, perhaps a downstream consequence of the AI/data centre build. US employment in the good sector fell in 9 of 12 months in 2025, But so far in 2026 it has grown in 7 of 8 months, and it appears to be accelerating.
But the USD only caught a very fleeting bid on Friday's strong US payrolls data, with most of its gains unwound across most USD-pairings within an hour of the release.
This curious price action is not a complete surprise though. Aug US PPI/CPI (Thu/Fri) are more definitive for the 16 Sep FOMC. Rate hikes are priced in across multiple other jurisdictions too - the ECB, the BoJ and the RBA to name several.
Structural USD risks linger as well. Trump demonstrated as much Friday, leaning on the Fed to cut. Adjacent to this: there was no shortage of big-picture anecdotes last week that speak to permanent capital questioning the core status of Treasuries and the US as a jurisdiction. Norway's USD2trn sovereign wealth fund are cutting their sovereign bond holdings across the baord, which includes Treasuries from 34% to 22% of its bond index, the Dutch central bank is moving gold out of the US, while Japan's Government Pension Fund (GPIF) held an unusual August asset-allocation meeting, which many read as a sign that they could be on the cusp of rebalancing towards domestic markets.
Australian Q2 GDP growth edges ahead of expectations
Australia's economy grew 0.4% in Q2. This could be read a number of ways.
It was a little stronger than expected, with yoy growth of 2.1% tracking slightly firmer than the RBA's 1.9% growth forecast. Households proved more resilient than expected too, with real disposable income rising 0.6% despite higher interest rates and energy costs. At the same time, unit labour cost growth accelerated to 3.6%yr from 3.2%yr, reflecting ongoing wage pressures and flat productivity. This all sounds like it would strengthen the case for RBA hikes.
But as our Chief Economist Luci Ellis points out growth has stepped down noticeably through the year, and about half the upside surprise in year-ended growth was a revision to a previous quarter. Q2 itself was pretty noisy too: Australians travelling overseas for the northern hemisphere summer fell, for the first time since COVID, due to flight cancellations around the Iran war, and there was a massive jump in EV sales in the quarter.
Commentators were divided on what this means for the RBA, with some saying it sets up the RBA to raise rates later this month, while others pointed out that the GDP data offered no smoking gun.
RBNZ delivers a dovish hike
The RBNZ delivered a second hike this cycle, 25bps to 2.75%. The messaging however came across as more dovish than expected. The Bank's forecasts point to a likely pause in October and one more 25bp hike in December, while stressing that future moves will depend on the data. Markets took that as a softer signal, with NZ rates moving lower after the meeting.
The cautious tone reflects concerns about the economy. While inflation remains sticky and most policymakers still see upside inflation risks, the RBNZ downgraded its medium-term growth outlook and highlighted downside risks to activity. The overall message was that rates will rise a little further, but the bar for additional hikes has become higher.
Moves across the AUD crosses
The slightly cautious RBNZ tone alongside "decent" local Q2 GDP the same day saw AUD/NZD rally more than +1c to 1.2286 (just shy of May's highs) on Wednesday. While off its peaks, the cross finished the week above the 1.22-handle.
AUD/JPY saw a sharp decline from 114.50, briefly dipping below 112.0 before stabilising back above 112.50.
AUD/EUR finally retook the 0.62-handle last week too, finishing the week more than 0.5% higher, these are 20-month highs for this cross.
The Australian dollar's better tone of late matches near neighbours. USD/CNY and and USD/KRW are breaking down to 3 1/2yr and 2yr lows respectively. Iron ore is rebounding through $100/t after seeming to struggle in the $90s/t for a time, while copper is a whisker from all-time highs.
Markets turn to US inflation data this week
Australia's data calendar is limited to the soft surveys - Sep Westpac Consumer Confidence and Aug NAB Business survey. But what the lack in substance they make up for in timeliness.
Westpac's Aug Consumer sentiment survey showed an unexpectedly strong 6% increase in the month (albeit with the index is still below 100, meaning pessimists outweigh optimists), with eye catching gains in time to buy a dwelling (+12%) and the economy in a year's time (+5.8%). Let's see if this is sustained into Sep - RBA rate hike expectations have jumped and petrol prices have been rising again.
RBA Deputy Gov. Hauser and Assistant Gov. Hunter speak as well.
US Aug PPI/CPI are the marquee events. PPI is unusually scheduled beforehand (though not unprecedented) and carries as much punch. Above consensus reads will solidify 16 Sep FOMC rate hike bets, while benign reads will see rate hike expectations rowed back.
Monday
- Labor Day holiday in US & Canada - markets closed.
Tuesday
- Australia Sep Westpac Consumer Conf., Aug NAB Business Survey
- RBA Deputy Gov. Hauser and Assistant Gov. Hunter speak
- US Aug NFIB Small Business Optimism
Wednesday
- China Aug PPI, CPI
Thursday
- ECB Policy Rate Meeting
- US Aug PPI
Friday
- Japan Aug PPI
- US Aug CPI, Sep Uni of Michigan Sentiment (Prelim.)
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