It’s been a rough couple of weeks for the Australian dollar. “End-of-cycle” thinking after the RBA’s dovish November hike, an 18% plunge in crude oil last week, and fresh concerns around the AI/data centre growth story following a Democrat sweep in the US midterm elections all weighed on the currency. AUD/USD finally gave way late last week, breaking below its October range and falling deep into the 0.68s, a key support zone that has remained intact since January.
The Australian dollar starts the week back near the 0.69-handle, stabilising from last week’s sharp risk-off wave. US CPI and PPI are the big tests this week. Softer inflation could give the Aussie some breathing room, but equities likely need to stabilise too. A hot print would keep Fed tightening risks alive and add further pressure. Locally, the Westpac and NAB surveys will test whether five hikes are finally starting to bite.
RBA delivers a dovish hike
The RBA delivered the expected 25bp hike this week, lifting the cash rate to its highest level since 2008. The Bank also revised its inflation forecasts higher, warning that underlying inflation will remain sticky, while the GDP forecast was downgraded by 0.3ppts. However, the surprise 6–3 vote split signalled a more dovish note, with three members placing greater weight on downside risks to growth and employment. Markets took this as a sign the RBA could be near the end of its hiking cycle. With other central banks still playing catch-up, the shift weighed on the AUD against its G10 peers early in the week.
Notable revisions to the SOMP include the RBA lifting its NAIRU estimate (non-accelerating inflation rate of unemployment) to 4.75% from 4.6%. The RBA also now sees core prices easing to 2.9% by the end of 2027, later than previously thought. The latest statement has removed the line that the RBA is “willing to increase the cash rate further if necessary” – further evidence that the RBA may be done on hikes.
The Australian dollar was lower on the day falling from the 0.70-handle into the mid 0.69s.
Democrats win control of Congress
After enjoying support from higher yields, strong AI investment and growth expectations, the USD took a hit mid-last week following the US midterm election. The Democrats retook Congress, winning control of the House and Senate. This effectively leaves President Trump a lame duck for the rest of his term as a Democratic Congress can block Trump’s legislative agenda, although Trump still retains veto power which rules out any massive policy shifts.
Policy-wise, at the margin, a Democratic Congress could reduce the probability of renewed escalation with Iran, modestly lowering the risk premium in oil, inflation expectations and US yields. USD price action reflected this initially, with DXY falling almost 0.6% on the day to a low of 101.09.
AI sells off sharply
However, speculation that a Blue Congress may push back on AI-data centre spending seemed to drown out everything else, fuelling a sharp AI/equity sell-off late in the week. With AI/tech stocks already facing sharp declines on valuation fears, the Democrat sweep triggered a sharper unwind with the NASDAQ losing more than US$3.5 trillion by Friday.
Unsurprisingly, AUD’s traditional risk qualities came to fruition over this rout, selling off sharply against its G10 peers. This was exacerbated by a more dovish RBA earlier in the week. AUD/NZD has dropped almost 2 cents over the week (-1%) to 1.2338, AUD/EUR is down 1.3% trading near 0.6179 and AUD/JPY has fallen 1.3% trading just above 109.0 on Monday afternoon.
US nonfarm payrolls
Concluding an event-heavy week, US Oct nonfarm payrolls beat expectations, increasing by 165k (vs exp. 70k), while unemployment edged down to 4.1%. Hiring was also broad-based, led by healthcare, professional services and manufacturing and private-sector hiring was the strongest since March.
For markets, the takeaway is clear: jobs are unlikely to stand in the way of another rate hike. With inflation still the bigger concern, markets price around an 80% chance of a December hike. The initial reaction reflected that view, with 2-year yields rising after the data.
The week ahead
US Oct CPI and PPI headline this week’s calendar. US inflation remained firm in September, with headline CPI rising 0.6%, although around half of the increase came from energy. Core inflation was softer at 0.3%, while underlying inflation outside food, energy and shelter eased to the Fed’s 2% target. For October, inflation pressures are expected to cool as energy and shelter costs ease.
Locally we are watching the Nov Westpac consumer and NAB’s Oct business surveys. Both have been soft in recent months amid elevated energy prices and rising interest rates.
We also receive Fedspeak – no less than 15 engagements – and China trade data.
Key Events
Monday
- Fedspeak; Bowman, Goolsbee, Barkin
Tuesday
- Australia Nov Westpac Consumer Conf., Oct NAB Business Survey
- China Oct Trade Balance
- US Oct CPI, NFIB Small Business Optimism
- Fedspeak; Logan, Schmid, Bowman, Paulson
Wednesday
- US bond markets closed; Veterans Day Holiday
Thursday
- Japan Oct PPI
- Fedspeak; Schmid, Daly, Goolsbee, Hammack, Williams, Barr
Friday
- US Oct PPI
- Fedspeak; Daly, Jefferson
