The Australian dollar’s steady climb became a sprint late last week, jumping 0.85% on Friday to fresh current leg highs near 0.7180. What had been a measured grind higher accelerated more emphatically, with the Australian dollar moving into the high 0.71s in just a few sessions. Unlike Jan/Feb’s rallies, this move is not being driven by a hawkish RBA story or stretched positioning. Instead, support is coming from a weaker USD backdrop, rising gold prices, strength across Asian currencies and Australia’s mining dividend season.
Treasury Secretary Scott Bessent’s announcement to expand Treasury bond buybacks, combined with escalating sanctions rhetoric towards Iran, reinforced concerns around the long-term outlook for the US dollar and helped propel AUD/USD to fresh cycle highs.
A busy week lies ahead, with Australia’s July CPI, RBA August meeting minutes and key GDP partials due, although they are likely to play second fiddle to Fed Chair Warsh’s keynote speech at the annual Jackson Hole Symposium.
Markets question the US dollar
US bond yields have climbed sharply since March, with the 30-year bond yield reaching highs not seen since 2007, despite softer payrolls data and moderating inflation, which would normally support lower yields.
US Treasury Secretary Bessent announced plans to double bond buybacks last week. This alleviated the immediate pressure for higher long-dated yields. But it proved to be very short-lived. The intervention raises all sorts of thorny questions around being drawn into an escalation cycle, the sustainability of the efforts and potential success. Of course, many commentators would note that this action and potentially more down the road does not get down to the root cause of what ails long-term US sovereign bonds – large fiscal deficits and still high inflation.
Despite Bessent stating that the Treasury holds an extensive “toolkit” to keep yields contained, investors are clearly demanding a higher risk premium to hold US assets amid ongoing geopolitical tensions, uncertainty around the future direction and independence of the Fed and rising government debt (US public debt reached more than $40 trillion for the first time, increasing by a third in less than five years).
Gold and Bitcoin both rallied as investors sought alternatives to US assets and the USD traded to a multi-month low of 98.55. While off last week’s lows, DXY remains under the 99-handle on Monday afternoon.
The Australian dollar starts the week holding onto last Friday’s gains, sitting above 0.7160. The AUD-crosses were mixed; AUD/NZD is down -0.36% over the week trading near 1.1990, AUD/JPY was up +0.8% for the week around 113.90 and AUD/EUR remained flat at 0.6130.
US to Announce New Sanctions Against Iran
The US Administration has pivoted to economic sanctions around isolating Iran and forcing concessions. Treasury Secretary Bessent will be announcing the details of the strengthened sanctions regime on Monday and reportedly includes penalties on countries that help Iran evade these sanctions. Oil prices declined earlier today by more than 1%, with investors seemingly taking profits ahead of the announcement.
Australian Labour Market Continues to Cool
Australia’s labour market showed further signs of cooling in July. Employment declined, unemployment edged up to 4.5% and hours worked softened, suggesting businesses are reducing hours rather than headcount.
While conditions remain resilient overall, labour supply continues to outpace employment growth, pointing to a gradual increase in spare capacity. Wage growth also remained contained in Q2, with annual growth slowing to 3.2% as private sector wage pressures eased.
China’s economy lost momentum in July, with industrial production, retail sales and investment all slowing. Ongoing weakness in the property sector continues to weigh on growth, adding to expectations that policymakers may need to deliver further stimulus in the months ahead.
A Busy Week Ahead for Markets
Fed Chair Warsh will be giving his first speech at the Kansas City Fed’s annual Jackson Hole Symposium. This event has a history of being very influential. The topic this year is “Financial Innovation: Implications for Payments and Policy”, which obviously doesn’t lend itself to monetary policy commentary. We’ll see.
Bessent will be unveiling “a new fiscal initiative” this week too, but this likely does little to reassure investors; US deficits are structural and there’s no legislative path or will to address this. This could be counterproductive.
Locally, attention will centre on July inflation data. Markets expect annual inflation to continue easing, with lower electricity prices helping offset higher travel and fuel costs. Consensus expects July trimmed mean CPI to print at 3.5% y/y.
Governor Bullock told us at their August press conference that the Board discussed the case for a hike. We will be looking to the RBA minutes for insight on this front.
Q2 GDP building blocks (private CAPEX & construction work done) are due this week and can shift the dial for Q2 GDP (due 2 Sep). After punchy Q1 increases in CAPEX and construction work done (data centre driven), forecasters anticipate more moderate profiles for Q2.
NVIDIA Q2 earnings and a range of central bank speakers also feature this week.
Tuesday
- RBA Aug Policy Meeting Minutes
- RBA Head of Domestic Markets David Jacobs speaks
- US Aug Conf. Board Consumer Confidence
- Fedspeak; Barkin
Wednesday
- Australia Jul CPI, Westpac Leading Index, Q2 Construction Work Done
- US Jul Personal Income/Spending, PCE
- NVIDIA Q2 Earnings
- Fedspeak; Barkin
Thursday
- China Jul Industrial Profits
- Australia Q2 Private CAPEX, Jul Household Spending
- BOJ Deputy Gov. Himino speaks
Friday
- Fed Chair Warsh speaks at Jackson Hole Symposium (27-29th Aug)
- Japan Aug Tokyo CPI
- Canada Jun GDP
- US Benchmark Payrolls Revision (Prelim.)
