• Debt jitters. Concerns about UK debt pushed up yields & weighed on GBP. Shaky risk sentiment supported the USD. AUD lost some ground.
• AU growth. Q2 GDP released today. A few push-pull forces at work. Growth expected to have picked up. RBA set to continue to lower rates slowly.
• Macro events. BoE members speak tonight, as does RBA Gov. Bullock & Fed voter Musalem. US JOLTS job openings data also released.
Global Trends
A few jitters across markets overnight with worries about the UK’s fiscal sustainability at the front of investors’ minds. Pressure is on UK PM Starmer and Chancellor Reeves to restore confidence in the government’s debt path give a sizeable fiscal hole has opened. UK Chancellor Reeves is due to deliver a budget before year-end and spending/tax measures need to be taken to plug the gap. On the back of waning demand, concerns over structurally higher UK inflation, and prospect of greater bond supply UK long-end yields extended their upswing with the 30yr rate (now ~5.69%) hitting its highest level since 1998 and the 10yr rate (now ~4.80%) not that far from its cyclical peak. The UK fiscal worries also spilled over into FX with GBP shedding ~1.1% against the USD and underperforming on the crosses (AUD/GBP +0.6%).
The UK nervousness sapped risk sentiment more broadly with European and US equities slipping back (EuroStoxx600 -1.5%, US S&P500 -0.7%). Bond yields increased with US rates ticking up 2-3bps across the curve. This is despite the US ISM Manufacturing survey remaining in ‘contractionary’ territory for the 6th straight month. That said, there were glimmers of light with ‘new orders’ jumping up to its highest level since January and ‘prices paid’ moderating a little. The backdrop supported safe-havens such as gold which touch a record (now US$3531/ounce) and the USD with the weaker European currencies (EUR also declined ~0.6%) providing a helping hand. USD/JPY rose (now ~148.35) while the NZD (now ~$0.5864) and AUD (now ~$0.6519) gave back a bit of ground.
The underlying fiscal concerns could keep investors wary for a while. Bursts of volatility at this time of year aren’t unusual. As our second chart below illustrates the VIX index has historically tended to rise over September as Northern Hemisphere participants return from summer vacation and reassess the lay of the land. Macro wise, members of the Bank of England testify to UK Parliament (11:15pm AEST), the ‘hawkish’ 2025 US Fed voter Musalem speaks (11pm AEST), and the US JOLTS job openings data is released (12am AEST). We think a further modest rebound in the beaten down USD might unfold if risk sentiment remains under pressure and/or the JOLTS report indicates US labour demand is holding up which in turn sees markets trim their near-term US Fed rate cut bets. Markets are pricing in a ~92% chance of a 25bp rate cut by the US Fed in mid-September.
Trans-Tasman Zone
Wobbles in risk markets on the back of the UK debt sustainability concerns and a firmer USD have taken a bit of heat out of the AUD and NZD (see above). That said, the moves haven’t been large with yesterday’s intra-day ranges in both on par with their respective long-run averages. Indeed, at ~$0.6519 the AUD is where it was tracking last Thursday and is still north of its mutli-month average. It is a similar story for the NZD (now ~$0.5864). Relative strength on a few of the major crosses also generated some support for AUD/USD with the AUD ticking up ~0.2-0.6% against JPY, GBP, and NZD over the past 24hrs. Diverging economic and interest rate trends in Australia’s favour are underpinning AUD/NZD which is at the top of the range it has occupied since March (now ~1.1118).
Today in Australia the dated Q2 GDP is released (11:30am AEST) and RBA Governor Bullock speaks (6pm AEST). There were some push-pull forces impacting growth in the June quarter with an inventory drawdown and soft government expenditure offsetting firmer private sector spending. On net, GDP growth looks to have quickened over Q2, though it may not be as strong as what the market is penciling in (consensus +0.5%qoq/1.6%pa). Nevertheless, we believe the bigger picture view that Australia’s growth pulse is turning the corner may solidify expectations looking for the RBA to continue to deliver only a gradual/drawn-out interest rate cutting cycle. Markets are factoring in the next RBA rate cut in November with only ~2 reductions priced in over the next year.
In our opinion, while more bursts of USD supportive market volatility may exert a little downward on AUD/USD in the near-term, we don’t expect these moves to last too long or extend too far. Over the longer-term (i.e. next 3-12 months) we believe the AUD should grind higher. We think the AUD may be supported by a combination of a softer USD, measured approach from the RBA, upturn in Australian economic activity, and/or signs of improvement in China’s economy as its stimulus push helps counteract tariff headwinds across its export sector.
