The Australian dollar faced plenty of headwinds last week. Growing concerns about AI-related spending, Brent crude pushing up to US$113/bbl, and ongoing fiscal and political uncertainty in France sent French bond yields to multi-year highs and left investors in a more cautious mood. Looking ahead to what will likely be a decisive and event-heavy week, markets will hear from RBA Governor Bullock and other RBA officials shortly ahead of local Sep CPI (Wed), before attention turns to a run of central bank meetings; RBNZ & FOMC (Wed), ECB (Thur) and BoJ (Fri).
The Australian dollar faced plenty of headwinds last week. Growing concerns about AI-related spending, Brent crude pushing up to US$113/bbl, and ongoing fiscal and political uncertainty in France sent French bond yields to multi-year highs and left investors in a more cautious mood.
Despite the broader risk-off backdrop, the Australian dollar held up better than expected against the US dollar. Easing expectations for further Fed rate hikes and strong demand for the relative safety of US Treasuries helped cushion AUD/USD, which starts the week above 0.7020.
Adding support locally, RBA Assistant Governor Sarah Hunter struck a firmer tone in a TV interview on Sunday, stating the RBA is “not quite done yet” on inflation. Australian bond yields moved higher earlier today following her comments, reinforcing expectations that the RBA remains focused on bringing inflation back to target.
Looking ahead to what will likely be a decisive and event-heavy week, markets will hear from RBA Governor Bullock and other RBA officials shortly ahead of local Sep CPI (Wed), before attention turns to a run of central bank meetings; RBNZ & FOMC (Wed), ECB (Thur) and BoJ (Fri).
AI Boom Faces Reality Check
The biggest story for markets was a sharp pullback in AI-related stocks. Investors have become increasingly concerned about whether the enormous sums being spent on AI infrastructure will generate sufficient returns.
Semiconductor stocks remained under pressure, dragging technology shares lower, while tech-heavy markets such as South Korea and China also struggled. The increase in volatility pushed investors towards safer assets, helping push the US 10-year Treasury yield back below 5% after recently reaching 5.3%.
Middle East Tensions Keep Oil Elevated
Drone attacks on Saudi Arabia by Iran-backed Houthi forces helped lift Brent crude towards US$115/bbl, raising fresh concerns about energy costs and inflation.
President Trump commented that a decision on Iran was approaching, saying the outcome would either be a “deal” or an effort to “finish it off”. The US has reduced some military and diplomatic staffing in the region, while threats to shipping and infrastructure linked to Iran and Iran-backed groups have continued. Trump has also indicated any renewed US strikes could occur after the Nov 3 midterm elections.
RBA Keeps Inflation Fight Front and Centre
Although the Australian dollar maintains a high risk beta to equities, the repricing in Fed expectations and US growth in the latter half of this year have been heavily dependent on the outperformance of AI stocks. This has left the USD vulnerable to AI/equity-related sell-offs. As such, despite this uptick in risk, AUD/USD managed to push higher over the week, climbing +0.7%.
Meanwhile, RBA officials have recently delivered more hawkish messaging. Deputy Gov. Hauser noted last week that the inflation outlook appears materially worse than the RBA expected in August. While he acknowledged that growth remains subdued and the labour market is gradually easing, markets interpreted his comments as a sign the RBA remains willing to tolerate weaker growth if needed to bring inflation back to target.
Hunter reinforced that message yesterday, stating that the RBA is not quite yet done fighting inflation. As a result, market pricing for a November RBA rate hike has increased to around 15bp, up from 5bp a week ago.
AUD Crosses
AUD/NZD traded in a relatively tight 1.2300-1.2372 range and finished the week relatively flat. This follows a recent compression in AU/NZ rate spreads. AUD/EUR is up +0.6% for the week, trading near 0.6260; ongoing fiscal/political unrest has seen French bond yields push to multi-year highs leaving the EUR broadly weaker. AUD/JPY is down -0.4% over the week, trading near 110.30.
The Week Ahead
It’s a busy week for markets, with Australia’s September CPI report and a packed central bank calendar.
Locally, investors will hear from Governor Bullock and other senior RBA officials ahead of Wednesday’s CPI release. Markets expect underlying inflation, as measured by the trimmed mean, to increase by 0.3% in September. Higher petrol prices and rising holiday travel costs are expected to be key contributors, and the result could have an important impact on expectations for the November RBA meeting. Offshore, attention will turn to the RBNZ, Fed, ECB and BoJ meetings.
The Fed faces a delicate balancing act. Inflation surprised to the upside in September, while Brent crude has climbed back towards US$114 per barrel. At the same time, the US economy remains resilient, although recent employment data has shown some signs of cooling. While these developments could justify another rate hike, markets have largely ruled out a move this week and instead see December as the more likely timing for the next hike.
In contrast, the RBNZ is almost fully priced to deliver a +25bp rate increase on Wednesday.
Key Events
Monday
- China’s CCP fifth plenum begins (Oct 26-29)
- RBA Assist. Gov Brad Jones speaks.
Tuesday
- China Sep Industrial Profits
- US Oct Conf. Board Consumer Confidence
Wednesday
- RBA’s Gov. Bullock, Hauser, Hunter, Jones & Kent appear before the Senate.
- Australia Sep CPI
- RBNZ Policy Rate Meeting
- FOMC Policy Rate Meeting
- Bank of Canada Policy Rate Meeting
Thursday
- Australia Q3 Import/Export Price Index
- ECB Policy Rate Meeting
- US Sep Personal Income/Spending, Core PCE, Q3 GDP (Adv.)
Friday
- Japan Oct Tokyo CPI
- Australia Q3 PPI, Sep Private Sector Credit
- BOJ Policy Rate Meeting
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