• US/Iran news. Oil fell & equities rose on the back of US/Iran news. FX more muted reflecting the uncertainty & macro challenges that remain.
• Event radar. China data due today. BoJ expected to hike rates & RBA predicted to hold. US Fed later this week, the first meeting for new Chair Warsh.
Global Trends
It has been a relatively upbeat start to the week with markets reacting somewhat positively to the news that a deal has (finally) been struck between the US/Iran. It isn’t a final deal, rather only a Memorandum of Understanding for a 60-day ‘ceasefire’ that will see the Strait of Hormuz reopened. Notably, the MoU doesn’t address Iran’s nuclear programme, which will be discussed over the next 2-months, so there is a chance this latest agreement breakdowns at some point as upcoming negotiations could be tricky.
Moreover, as discussed before, the conflict should only be seen as the end of ‘phase 1’. The impacts on the global economy from prolonged disruptions to energy supply and production of other commodities/products might cast a long shadow, and they may only just be starting to bubble to the surface. The flow of energy and sea-freight via the Strait of Hormuz won’t return to pre-conflict run rates for some time given issues around the path itself due to sea mines, insurances, and other things like shipping capacity/availability. On top of that, turning on dormant oil wells isn’t like flicking on a light switch. Reservoir physics and operational challenges, as well as the repair to damaged infrastructure, means supply is unlikely to be back where it was for months/quarters, not days/weeks. The world/Asian economy is still facing fundamental difficulties from the ‘chaos’ that has gone on.
This helps explain why the reaction in some markets has been more muted. On the one hand, oil prices declined with brent crude down near US$83/brl (a low since early March), and short-sighted ‘glass half full’ equities pushed higher (US S&P500 +1.7% and the tech-focused NASDAQ rose ~3.1%). By contrast, bond yields eased with US rates dipping slightly, and in FX the USD index has been range-bound. EUR is tracking sub ~$1.16 and USD/JPY is just over ~160 ahead of todays BoJ meeting (no set time for announcement) where a 25bp interest rate hike is close to being ~100% priced in. The NZD unwound yesterday mornings modest jump (now ~$0.5821) and the AUD gave back some of its initial headline driven gains (now ~$0.7070).
On top of the BoJ, China data is due today (12pm AEST), and the RBA is widely expected to keep interest rates on hold (2:30pm AEST). Outside of major surprises, the main macro focal point this week will be the US Fed decision and new Chair Warsh’s press conference (Thurs morning AEST). Market expectations are leaning towards a ‘hawkish’ statement and updated projections (i.e. easing bias likely to be dropped, US inflation outlook revised higher, and ‘dot plot’ to show no change in rates in 2026 or even a few members looking for a hike). Key will be Chair Warsh’s take and whether he tries to sell the rate cut outlook preferred by President Trump. If not, we believe the USD could strength as it might bolster the view that the next move by the Fed may actually be a rate rise.
Trans-Tasman Zone
The positive vibes seen in global equities and the pullback in oil prices stemming from the weekend news about the latest ‘ceasefire’ deal between the US/Iran (see above) didn’t really spillover into FX markets. The NZD (now ~$0.5821) unwound yesterday’s initial jump. The AUD (now ~$0.7070) is not that far from where it closed last week and is just below its ~6-month average. The AUD also tread water on most of the major cross-rates with AUD/EUR consolidating (now ~0.6102), modest gains of ~0.1-0.2% recorded against JPY, GBP, and CAD, and a slight fall posted versus CNH (now ~4.7790).
During today’s Asian session the monthly China data batch is due (12pm AEST), market traders and surveyed economists are expecting the Bank of Japan to deliver another 25bp rate hike (no set time for decision), and the RBA looks set to keep rates on hold at 4.35% after delivering three consecutive increases the past few months (2:30pm AEST, press conference 3:30pm AEST).
The RBA cash rate is now back at a level that is leaning against activity. Some of the key domestic data released since the May RBA meeting has softened. Hence, we think the RBA could reiterate there is “space” to assess the lay of the land and how inflation risks are unfolding. Given high household debt levels interest rate changes bite rather quickly, and the signs of a deceleration in growth/cracks in the jobs market have raised doubts more tightening by the RBA is likely. Markets are only pricing in another ~18bps of RBA hikes by next February. By contrast, the improvement in US growth and upturn in the US jobs market, as well as lingering inflation risks, might see the US Fed (Thurs morning AEST) jettison its easing bias and/or signal there is a chance of hikes down the track via an upward shift in its interest rate projections. On net, based on these cross-currents we think yield differentials might have peaked and could be starting to turn against the AUD. This may be compounded by the slowdown in Australian growth and challenges faced by the global/Asian economy from the prolonged Middle East conflict and disruptions to energy/supply-chains. We believe upside potential in the AUD could be limited.
