We’ve only bedded down one full week of trading in the new year, but it feels like we’ve had to process a year’s worth of consequential news already; most obviously the toppling of Venezuelan President Maduro, unrest in Iran and threats to Greenland’s territorial integrity. There’s been no let-up today, with Fed Chair Powell announcing that the Fed has been served a grand jury subpoena threatening criminal indictment. The week ahead should be no less lively when it comes to geopolitics, ongoing threats to Fed independence and the data flow. The week ahead is headlined by US Dec CPI and locally, the first read on consumer sentiment in the new year.
Australian dollar takes a breather after a solid start to 2026
We’ve only bedded down one full week of trading in the new year, but it feels like we’ve had to process a year’s worth of consequential news already; most obviously the toppling of Venezuelan President Maduro, unrest in Iran and threats to Greenland’s territorial integrity. There’s been no let-up today, with Fed Chair Powell announcing that the Fed has been served a grand jury subpoena threatening criminal indictment. Markets are taking these extraordinary developments in stride, for the most part. The week ahead should be no less lively when it comes to geopolitics, ongoing threats to Fed independence and the data flow. The week ahead is headlined by US Dec CPI and locally, the first read on consumer sentiment in the new year.
Australian dollar starts year on front foot
AUD started the year on the front foot with a quick US1 cent sprint to 15-month highs at 0.6767 (7 Jan). AUD/EUR also finally broke out of its long 0.55-0.57 slumber last week, to just shy of 0.58, levels not seen for a good 6 months. AUD/JPY, AUD/CAD and AUD/NZD all broke new ground last week as well.
This was all unfolding Wednesday, but then a non-threatening Nov CPI and a patient sounding RBA Deputy Gov. Hauser threw a spanner in the works.
Nov headline CPI printed weaker than expected at 3.4% YoY (vs exp. 3.6%), however the pace of trimmed mean measure remained steady at 3.2% YoY. The largest contributors included housing, food and non-alcoholic beverages, and transport, but there was encouraging downsides in garments, household services and contents. The Nov CPI outcome has defused some of the upside risk that was building around Q4 trimmed CPI (due 28 Jan).
In an interview with ABC on Thursday, Deputy Gov. Hauser didn’t sound any more hawkish than recent RBA communications. If anything, there was an air of patience to his comments and the immediate threat of a Feb rate hike receded a little. He said “we’re trying to target inflation in a year or two years’ time” and “We don’t have a rule that says if it’s 0.9 we hold, and if it’s 1 we raise and if it’s 0.7 we cut — we take a view of the whole economy”.
In the wake of the CPI and Hauser’s comments, markets walked back pricing for a Feb hike to about 6bps from around 10bps and for 2026 as a whole, trimmed pricing from 40bps to about 33bps. A correction in AUD/USD ensued and by Friday the pair corrected almost US1 cent from its 0.6767 highs.
Commodities break higher in the new year
During all the consequential geopolitical news in the new year, commodities are on fire. Copper periodically traded higher through 2025 but an impulsive break higher unfolded in December and extended into the new year which saw Copper rally 25% in 5 weeks to $13,387/t on the LME.
Precious metals continue to break unchartered levels. Silver outdid copper with a 63% gain since the start of December. Gold continues to forge ahead on geopolitics and threats to Fed independence hitting new lifetime highs today as well just shy of $4600/oz.
Iron ore is getting in on the act as well. Despite very high levels of port inventories in China, Singapore iron ore has firmed in the new year to just shy of $110/t.
These commodity price gains obviously spilled into AUD upside in the new year and continue to provide a supportive backdrop. AUD/USD may be off its highs, but this commodity backdrop continues to help AUD on a range of key crosses.
Questions about the dollar’s status at the start of a new week
A sleepy start to this week was given a wake-up call when the Fed issued a press release that they had been served grand jurors subpoenas on Friday. Fed Chair Powell issued a statement and a video and is clearly not taking this lying down. The USD was marked lower across the board on this news. We still await the announcement of the next Fed chair later this month. The arc of this story – Fed independence – still has a very long way to run, and adds to the growing list of long-term question marks about the USD.
There’s the scarcely believable rhetoric around annexing Greenland, banning defence companies from doing capital returns and blocking institutional investors from buying homes, not to mention a new (dovish) Fed Chair announcement later this month, the 21 Jan Supreme court hearing into Fed Governor Cook’s firing, and at some point the Court’s opinion on the legality of IEEPA tariffs. The temporary bill that reopened US Govt expires Jan. 30, setting up another showdown.
Geopolitics front and centre
On Jan 3 the US launched a military strike against Venezuela during which its President, Nicolas Maduro, was captured and brought to the US. Since then, the US government has seized “temporary” control of Venezuela’s crude oil reserves with 1.68Mb loaded during the first week of the month and cargoes mainly bound for US refiners.
While oil prices faltered slightly on concerns of a worsening oil supply glut, the outbreak of anti-government protests in Iran have kept oil prices elevated. With several hundred protesters killed, Trump has threatened military action to which Iran responded it would “retaliate if attacked” – crude oil futures have accordingly surged more than 6% since last Thursday to $59.5/bbl.
Trump has also renewed threats to seize control of Greenland, putting the future of NATO in doubt, with several European nations, namely the UK and Germany scrambling to organise greater security and defence for the region. These potentially hugely consequential geopolitical shifts have not really had an impact on FX markets, yet. But they nevertheless play to the ongoing brand damage to the US’ stature on the global stage as the guardian of the western alliance.
On the data front, the US Dec jobs report was read by the market as mixed. Dec payrolls grew by a mediocre 50k and the previous 2 months were revised down by an eye-catching 76k. But the unemployment rate unexpectedly slipped 0.1ppts to 4.4%. Other data in the week was pretty mixed for the US. Nov JOLTS job openings fell to their lowest level since Sep 2024, whilst Dec services ISM index showed a punchy rebound, to its highest levels since Oct 2024.
Global equities posted modest gains over the week, with the S&P500 climbing 1.6% despite rising geopolitical tensions between the US and several other nations. US 10-year yields oscillated in a 4.12-4.20% range, finishing the week in the middle of this range.
The week ahead…
Turning to the week ahead, the calendars are headlined by US Dec CPI and PPI, and Nov retail sales. The Fed’s Beige Book will also be released. Japanese markets are closed today on account of the Coming-of-age holiday. In Australia, we have consumer sentiment figures for January and Q4 Job Vacancies. Today’s Nov ABS household spending data shows recovery momentum continuing to build.
Monday
- Fedspeak; Williams, Barkin, Bostic.
- Japanese markets closed for Coming-of-age holiday.
- G7 finance ministers meet in Washington to discuss rare earths.
Tuesday
- Australia Jan Westpac Consumer Confidence
- US Dec CPI, Federal Budget Bal., Oct New Home Sales
- Fedspeak; Barkin, Musalem.
Wednesday
Australia Nov Job Vacancies
- China Dec Trade Bal.
- US Nov PPI, Retail sales
- Fed Beige Book
- Fedspeak; Miran, Williams, Kashkari, Paulson, Bostic.
Thursday
- Australia Jan Consumer Inflation Expectation
- Japan Dec PPI
- US Jan Empire State Manf.
- Fedspeak; Barkin, Schmid, Barr.
Friday
- US Dec Industrial Production
- Fedspeak; Jefferson, Bowman.
