• Shaky ground. A bout of risk aversion has washed through markets the past few days. US equities lose ground. USD firmer. AUD down near ~$0.6900.
• Macro pulse. US PCE deflator out tonight. Australian jobs report due today. We think the cross-currents point to more downside risks for the AUD.

Global Trends

Markets have been on edge for the past few days with a bout of risk aversion washing through. Equities have fallen back. The US S&P500 has lost ground for three straight sessions, with the tech-focused NASDAQ underperforming. The NASDAQ has declined by ~4% so far this week, however as our chart shows this comes after a stellar run and the recent wobbles only put the index back where it was in mid-June. Valuation concerns across semiconductor and AI-linked stocks have been a factor, though a robust earnings update from Micron Technology may help support sentiment in the near-term.

Another element at play has been the adjustment in thinking about the outlook for US Fed policy. Following the ‘hawkish’ rhetoric and guidance at last week’s US Fed meeting, Treasury Secretary Bessent stressed President Trump will give new Chair Warsh space to make his own decisions. Long end bond yields tumbled overnight (US 10yr -10bps) due to a drop in oil prices (WTI crude -4.5% to ~US$69.90/brl, a low since early-March), however front-end rates, which are more aligned to monetary policy expectations, remain elevated. At ~4.15% the US 2yr yield is near the top end of the range traded since February 2025. Markets are pricing in a US Fed rate hike by October and a ~60% chance another is delivered by next March. In FX, the backdrop has boosted the USD. The EUR (the major USD alternative) is down at levels last traded in May 2025 (now ~$1.1360), USD/JPY is around multi-year highs (now ~161.75), and GBP is close to its two-year average (now ~$1.3166). Cyclical currencies like the NZD (now ~$0.5651) and AUD (now ~$0.6901) have weakened with the NZD around year-to-date lows and the AUD at the bottom of the range occupied since early-April.

With the outlook for US interest rates somewhat in the market drivers seat, tonight’s US PCE deflator reading (10:30pm AEST) will be in focus given it is the Fed’s preferred inflation measure. Based on relevant details from CPI, PPI, and import prices, US headline and core inflation on this measure are forecast to accelerate, and we believe the risks are tilted to outcomes a bit higher than consensus predicts. If realised, we think this could see markets bake in even more potential tightening by the US Fed which in turn might see the USD strengthen further.

Trans-Tasman Zone

The combination of a bout of risk aversion and shift in US Fed policy expectations has weighed on cyclical assets like equities and supported the USD (see above). This in turn has exerted more downward pressure on the NZD and AUD over the past few days. At ~$0.5651 the NZD is around levels last traded in late-November 2025, while the AUD (now ~$0.6901) is approaching the bottom of the range occupied since late-January and ~5.2% from its cyclical peak touched in early-May. The AUD has also underperformed on the major cross-rates. Outside of AUD/NZD (now ~1.2212), which is still at elevated levels, other crosses like AUD/EUR, AUD/JPY, AUD/JPY, and AUD/CNH are close to the bottom of their respective 1-month ranges.

Data wise, the May reading of Australian CPI inflation was released yesterday. At first glance, the data looks like a mixed bag with headline inflation slowing to 4%pa due to a drag from fuel prices, and core inflation nudging up (now ~3.6%pa). However, some of the other data and trends such as the quarterly impulse and muted pass-through to other areas from fuel costs suggests Q2 inflation (which the RBA is lasering in on) might not be ‘worse’ than the central bank is already penciling in. This suggests that while the RBA should continue to talk tough about more rate rises, it may not act again unless inflation concerns worsen and/or the growth turns the corner.

Markets are factoring in a ~28% chance of a RBA rate hike on 11 August, with ~15bps of tightening discounted by year-end. Today, attention will be on the monthly jobs report (11:30am AEST). The early Easter and timing of school holidays were factors behind the weak report in April. Consensus expectations are looking for a bounce back in jobs (mkt +32,500) and dip in unemployment (mkt 4.4%) in May. That said, if things fail to ‘mechanically rebound’ markets could swiftly remove the remaining RBA rate hike expectations, which in turn could see the AUD lose even more ground. In our view, even if the labour report shows a bounce back in May, upside potential in the AUD may be limited based on our view the USD might strengthen further because of firmer US inflation (US PCE deflator is out tonight at 10:30pm AEST). Moreover, based on the diverging cross-currents we think yield differentials (which are suggesting the AUD may be too high) could turn even more against the AUD. This might be compounded by a slowdown in Australian growth and challenges faced by the global/Asian economy from the prolonged Middle East conflict and disruptions to energy/supply-chains.