The Australian dollar spent much of last week holding comfortably in the mid-0.71s before buckling under the weight of higher US yields and a softer labour market report. The Australian dollar faces a defining week. The spotlight is firmly on the RBA, with markets expecting a 25bp rate hike tomorrow ahead of Wednesday’s CPI. Markets will be closely watching the Governor’s press conference, voting split and any commentary around softer labour market conditions for clues on whether further rate hikes remain on the table.
The Australian Dollar Faces a Defining Week
US yields and oil prices continued to push higher last week as tensions between the US and Iran remained elevated. The Australian dollar spent much of last week holding comfortably in the mid-0.71s before buckling under the weight of higher US yields and a softer labour market report.
Oil prices opened the week higher after President Trump rejected Iran’s proposal to reopen the Strait of Hormuz, while news of fresh US-China tariff reductions provided a modest boost to global risk sentiment.
The Australian dollar faces a defining week. Locally, the spotlight is firmly on the RBA, with markets expecting a 25bp rate hike tomorrow ahead of Wednesday’s CPI. Markets will be closely watching the Governor’s press conference, voting split and any commentary around softer labour market conditions for clues on whether further rate hikes remain on the table. In the US, September nonfarm payrolls, August PCE inflation and a busy calendar of Fed speakers will also be closely watched.
Labour Market Cools at the Margin
Australia’s labour market remains resilient, but signs of cooling are becoming more evident. Employment rose a stronger-than-expected 39.5k in August, however a sharp lift in workforce participation pushed the unemployment rate up to 4.6% from 4.5%, its highest level since 2021.
The data signalled that labour supply is continuing to outpace demand, reinforcing the view that conditions in the jobs market are gradually easing.
Higher Oil and Yields Boost the USD
US bond yields surged to fresh multi-decade highs last week as investors grappled with sticky inflation, rising oil prices and fading hopes of a near-term resolution to tensions between the US and Iran. Brent crude has opened the week above US$107/bbl, up almost 18% month-to-date.
Markets are increasingly embracing a “higher-for-longer” interest rate outlook, with expectations that the Federal Reserve could continue raising rates into 2027.
The S&P Global composite PMI rose to 58.4 in September, its highest reading in more than five years, while new orders increased at their fastest pace in over four years.
This combination of higher yields, stronger growth and elevated oil prices helped lift the US dollar, with the DXY Index pushing above the 101.0 level for the first time since July.
The Australian dollar was broadly weaker against its G10 peers over the week. AUD/JPY fell 1.1% to trade near 110.70 on Monday as investors remained wary of potential Japanese intervention. AUD/NZD began the week at fresh 13-year highs near 1.2491 before hawkish comments from RBNZ’s Willis prompted a pullback, with the pair trading around 1.2390.
US-China Relations Take a Small Step Forward
The US and China agreed to extend their existing trade truce by two months, pushing the expiry date out to 10 January 2027.
Headlines earlier today also indicated both countries have agreed to reduce tariffs on approximately US$30bn of non-sensitive goods in each direction, including agricultural products, small appliances and decorative goods.
The Week Ahead: RBA, Local CPI and US Payrolls
A pivotal week lies ahead; RBA (Tue) & August CPI (Wed) headline local calendars. While a 25bp rate hike is largely expected, markets will be more focused on guidance around the future policy path.
Governor Bullock has reinforced the upside risks to inflation on several occasions, however we receive August CPI after tomorrow’s meeting. Westpac expects annual CPI to accelerate to 4.0% in August from 3.5% in July, largely driven by higher fuel prices following the return of the full fuel excise. While headline inflation is expected to move higher, underlying inflation pressures are still expected to ease gradually.
With markets currently assigning around a 50% chance of a November rate hike, Wednesday’s CPI report could prove decisive.
In the US, September nonfarm payrolls will also be closely watched. US jobs growth remained solid in August, with 162k jobs added and a further 55k jobs added through revisions to previous months. While labour market conditions remain healthy, a slight increase in labour force participation could see the unemployment rate edge up to 4.2% in September.
Monday
- Fedspeak; Bowman, Cook, Barkin
Tuesday
- RBA Policy Rate Meeting
- Australia Aug Household Spending
- US Sep Conf. Board Consumer Confidence, Aug JOLTS Job Openings
- Fedspeak; Goolsbee, Williams, Bowman, Barr, Waller
Wednesday
- Australia Aug CPI, Private Sector Credit, Building Approvals
- China Sep Official PMI, Rating Dog PMI
- US Aug PCE, Consumer Spending/Income
- Fedspeak; Barkin, Cook, Goolsbee, Kashkari
Thursday
- Chinas National Day Holiday begins – mainland markets shut 1 – 7 Oct
- Japan Q3 Tankan Survey
- Australia Aug Trade Bal.
- Eurozone Aug Unemployment
- Fedspeak; Barkin, Collins, Schmid, Cook, Williams, Waller, Jefferson, Bowman, Logan
Friday
- Japan Sep Tokyo CPI
- Eurozone Sep CPI (Prelim.)
- US Sep Nonfarm Payrolls
