It started out calmly enough for the Australian dollar last week, comfortably trading on the 0.69-handle and even very briefly pushing above 0.70c just ahead of US Sep CPI mid-week. But a stronger-than-expected print, followed by softer Australian labour force data Thursday and AI volatility, upset the Australian dollar’s calm demeanour sending it to 0.6894, its lowest level since July.
The Australian dollar has since steadied and we start the new week trading back above 0.6950. On the calendar this week; RBA Deputy Gov. Hauser speaks (Wed), NZ Q3 CPI (Thu), we receive preliminary global Oct PMIs and US big tech earnings. However, data likely plays second fiddle to Middle East headlines and AI volatility.
RBA Keeps a Watchful Eye
The Sep RBA meeting minutes were interpreted as mildly hawkish, with the Board warning that domestic capacity pressures and cost pass-through could prove more persistent than previously assumed.
The Board also noted that a weaker Australian dollar could complicate the inflation outlook if rising global interest rates are not fully reflected in Australia. At the same time, members acknowledged that the real trade-weighted Australian dollar remains somewhat above estimates of fair value, offsetting some of the pressure from higher interest rates. The market reaction was subdued, with no significant change in Nov rate hike pricing (+5bp currently priced).
Assistant Governor Kent spoke today with a mix of both hawkish and dovish angles – there’s reasonable evidence that neutral rates are marching higher, global growth has been stronger than expected and anecdotally firms are inclined to pass on costs, but against that household consumption is softening, the labour market is softening and markets were right to reprice after the jobs data.
The September NAB Business Survey showed confidence falling sharply as higher fuel prices and interest rates squeezed businesses. Profitability fell to its weakest level since 2020, although the survey had little impact on the Australian dollar.
US Inflation Tests Markets
US yields were already drifting lower early in the week, helping AUD/USD briefly reclaim the 70c-handle. That didn’t last long. September US CPI initially landed as a “sell first, ask questions later” release, sending the Aussie back below 70c and rattling broader markets.
However, once investors dug through the details, the picture looked a little less alarming. Much of the upside surprise was driven by a handful of categories, particularly shelter costs, allowing markets to take a slightly calmer view after the initial reaction.
Soft Jobs Data Trips Up the AUD
Australia’s labour market had a softer month in September, with employment falling by 39.3k against expectations for a 20k increase. The unemployment rate edged up to 4.7%, while the participation rate slipped to 66.8%.
Some of the weakness may reflect payback after a stronger August result, but the broader trend remains one of a labour market slowly losing steam. Put simply, employment growth isn’t keeping up with population growth.
For the Australian dollar, the timing couldn’t have been worse. The disappointing jobs result arrived against an already fragile backdrop and helped push AUD/USD down to 0.6894. While softer jobs data may reduce pressure on the RBA over time, it also removes one of the stronger pillars supporting the Australian dollar. As a result, AUD crosses suddenly trade with a more vulnerable tone after hitting multi month/year highs in some cases recently (AUD/NZD and AUD/EUR).
AUD/NZD experienced one of the bigger moves of the week. After touching a fresh decade high at 1.2494 last Tuesday, the cross tumbled more than 2 cents to 1.2269 as weak Australian jobs data, a risk-off market mood and a hawkish read to RBNZ Chief Economist Conway’s comments combined to weigh on the Aussie. AUD/NZD has since steadied and begins the week around 1.2330, down roughly 1% over the week. AUD/EUR slipped 0.4%, while AUD/JPY was comparatively resilient and starts the week near 110.30.
Warsh Offers Few Clues
Comments from Fed Chair Kevin Warsh at IMF Meetings in Bangkok on Friday provided little fresh guidance on the Fed’s October meeting, with markets continuing to price a token 4bp of tightening. Beyond that, a quarterly Fed hike profile from Dec 2026 to Jun 2027 is now embedded.
Meanwhile, government bonds found some friends. After climbing sharply in recent months, US Treasury yields fell across the curve as investors sought shelter from growing market volatility. The 2-year yield fell 8bps while the 10-year yield dropped 18bps over the week.
Whether that move continues this week remains an open question. Concerns surrounding AI investment, and elevated valuations continue to support defensive positioning, although many of the factors that pushed yields higher in recent months remain firmly in place.
While AI-hyperscaler investment and the global data centre build-out continues unabated, public and private markets are showing visible strain and angst with the investment demands. Three significant data centre/AI cloud computing IPOs have been pulled in recent weeks in Australia, the UK and the US and some notable names in the space have seen their debt increasingly trade at distressed levels. The question is whether this is just a shakeout or the start of a bigger, more disorderly unwind.
The Week Ahead: Earnings, PMIs and Central Banks
There’s plenty to keep markets occupied this week. Locally, RBA Deputy Governor Andrew Hauser speaks on Wednesday and investors will be watching closely to see whether last week’s softer labour market data changes the Bank’s tone at all ahead of November.
Offshore, earnings season steps up another gear with several major US technology companies reporting results. Given how much recent market volatility has centred around AI expectations, those earnings reports could have an outsized impact on risk sentiment and the Australian dollar.
Friday’s preliminary October PMI surveys across Australia, Japan, Europe, the UK and the US should provide the clearest read yet on how global growth is tracking heading into year-end.
Key Events
Monday
- Canada Sep CPI
Wednesday
- RBA Deputy Governor Hauser speaks
- UK Sep CPI
- US Big Tech earnings
Thursday
- NZ Q3 CPI
Friday
- Australia, Japan, Eurozone, UK and US Oct S&P Global PMI (Preliminary)
- Japan Sep CPI
- US Oct University of Michigan Sentiment Survey
