• Fed hike. A ‘hawkish’ US Fed rate rise. Forecasts point to more ‘tightening’ later this year. US equities dip. USD firmer. AUD & NZD remain on the backfoot.
• Macro pulse. US retail sales stronger than expected. US Fed has more work to do. BoE tonight & BoJ tomorrow. RBA predicted to hike rates later this month.
Global Trends
Economic events in the US were in focus overnight with a strong retail sales report compounded by a ‘hawkish’ interest rate hike by the Federal Reserve. US retail sales grew 1.2% in August, a positive signal about broader macro momentum given consumer activity is the engine room of the economy (household consumption is ~3/4’s of US GDP). In terms of the US Fed, because “inflation remains elevated” the committee unanimously voted to lift interest rates by 25bps to 3.75–4.00% with the actions supporting a “timelier return” to the 2%pa inflation goal. This was the first move by the US Fed since last December (when it cut interest rates) and the first ‘tightening’ step since mid-2023. Notably, the Fed kept the door open to more action down the track. Chair Warsh repeated messages from his Jackson Hole speech noting that it is hard pressed to view financial conditions as ‘restrictive’, that inflation is too high, and that inflation risks are to the upside. With this in mind, the Fed’s latest projections (which had US growth and inflation revised up and unemployment revised down) showed that 12 of 18 submitters penciled in one more rate rise this year, while four are anticipating two moves over the remaining two meetings of 2026. The change in trajectory is inline with the signals from our policy-rule based models for US rates.
Given the Fed move was ~90% factored in before the event, and markets have been pricing in more hikes for a while, the reaction wasn’t overly dramatic. However, the response was still somewhat inline with the Fed’s ‘hawkish’ vibes. US equities lost ground (S&P500 -0.5%), bond yields edged up (the US 2yr rate rose ~7bps and the 10yr ticked up to ~5.02%), and in FX the USD strengthened a little. EUR (the major USD alternative) dipped to ~$1.1463 (a low since late-July), GBP weakened (now ~$1.3378), and USD/JPY increased (now ~156.26). The NZD remained under downward pressure, which has been in place since the last ‘dovish’ RBNZ rate rise, to be at ~$0.5713 (~4.3% from its late-August peak). The AUD is close to the bottom of its 1-month range (now ~$0.7087).
Tonight, the Bank of England is expected to hold steady (9pm), while tomorrow the Bank of Japan is tipped to wade in and lift interest rates after sitting on the sidelines for a few months. This may generate more intermittent bursts of market and USD volatility given USD/JPY is the second most traded currency. But overall, we believe the underlying inflation pulse in the US, coupled with outlook for more US Fed policy tightening, elevated oil prices (given the US’ status as a ‘net energy exporter’), and shaky risk sentiment should keep the USD supported over the near-term.
Trans-Tasman Zone
The firmer USD and wobbles in cyclical assets (as illustrated by another dip in US equities and modest fall in base metals like copper) on the back of the ‘hawkish’ US Fed rate hike has exerted more downward pressure on AUD and NZD (see above). The NZD has been on the backfoot for a few weeks and at ~$0.5713 it is over 4% from its late-August peak. The jump in oil prices has been a factor, given NZ is a ‘net energy importer’, as has the USD upswing and questions about how many more rate hikes the RBNZ might deliver this cycle. This morning’s better than predicted NZ GDP, which showed the economy grew 2.6%pa in Q2 could generate a bit of renewed support for the beleaguered NZD, in our opinion.
The AUD (now ~$0.7087) is near the bottom of its 1-month range, ~2% from its recent peak, with some relative outperformance against the EUR, JPY, GBP and NZD cushioning the Fed-related impacts over the past 24hrs. That said, AUD/CNH (-0.6% to ~4.7569) has weakened and is tracking below its 1-year average.
We remain of the view that medium-term upside potential in the AUD is constrained, and that there are more downside than upside risks over the period ahead. On the one hand, we believe elevated oil prices (given the US is a ‘net energy exporter’) may be USD supportive, as should the prospect of another ~1-2 US Fed rate hikes over the next few months. On the AUD side of the ledger, we also think the outlook for higher RBA interest rates is well priced in (a late-September RBA hike is assigned a ~83% chance and ~70bps of tightening is discounted by Q3-2027). However, the local growth challenges stemming from rising mortgage costs and housing downturn may not (yet) be fully appreciated. Moreover, as outlined previously, FX is a relative price. While the RBA looks set to hike interest rates further, other central banks might have to do more from here, hence yield differentials may gradually turn against the AUD. That said, the level of interest rates and spreads does need to be considered. We remain of the opinion that the projected path forward means the AUD should average a higher rate than it did a few years ago (i.e. ~$0.70-0.71 compared with ~$0.66-0.67 over 2024/25).
