• Optimistic markets. Equities rose, oil dipped on positive US/Iran vibes. More volatility likely. USD softens. AUD whipped around by push/pull forces.
• RBA hike. RBA announced its 3rd straight rate rise. Another hike more likely than not. But it will come at an economic cost. Growth set to slow sharply.
Global Trends
Sentiment about the situation in the Middle East has generated a few bursts of volatility over recent sessions. Following a deterioration in risk appetite yesterday indications the US/Iran ceasefire is holding eased fears overnight. US officials downplayed Iran’s actions stating that the targeting of warships and attacks on vessels in the Strait of Hormuz were below the ‘threshold’ for restarting the conflict. The rebound in equities helped the US S&P500 (+0.8%) edge up towards record highs. Oil prices eased, though at ~US$110/brl brent crude remains elevated. Outside of a lift in UK bond yields, rates across Europe and the US slipped back. In FX, the USD softened a touch. EUR (the main USD alternative) is tracking near ~$1.17, USD/JPY ticked up (now ~157.93), and GBP consolidated (now ~$1.3542). The NZD rose, though it remains in negative territory for the week (now ~$0.5887). It has been a similar story for the AUD (now ~$0.7183) with yesterday’s RBA rate hike and commentary about the outlook creating some push/pull forces.
In the US the JOLTS report (a gauge of labour demand) showed that while aggregate job openings softened a fraction in the month, momentum measures such as the ‘quits rate’ (a measure of jobs churn) and the ‘hiring rate’ improved in March. The hiring rate is now at its highest since May 2024. The services ISM index also held up in ‘expansionary’ territory with hiring intentions also rising over the month.
As discussed before, given the decision makers at the heart of the action the situation in the Middle East is fluid and bouts of headline-driven volatility should be expected for a while yet. The longer things continue as they are the greater the chances there is of a steep slowdown in world growth due to protracted disruptions to energy supply and spillovers on supply chains. Beyond Middle East developments, the US labour market pulse will also be in focus with ADP employment (10:15pm AEST), Challenger job cuts (Thurs night AEST), and non-farm payrolls (Fri night AEST) due. US non-farm payrolls have whipped around the past few months, and based on the zigzag pattern a softer read is predicted by analysts after the strong showing in March (mkt +62,000 in April). In our view, the signals from leading indicators and re-acceleration in US growth in Q1 suggest the risks are tilted to the US jobs report coming in better than forecast. If realised, we think this may reinforce thinking the US Fed will stay on hold for an extended period which in turn could give the USD a boost.
Trans-Tasman Zone
Swings in risk sentiment and the USD, as well as reaction to yesterday’s RBA rate rise and updated views about the outlook have pushed/pulled on the AUD. At ~$0.7183 the AUD is a bit higher compared to this time yesterday, however it is still in negative territory for the week. The AUD also perked up on most of the major crosses with gains of ~0.1-0.2% recorded against the EUR, GBP, CAD, and CNH, while there was a larger ~0.7% lift posted versus the JPY. AUD/JPY (now ~113.43) has recouped about half of its recent Japanese FX intervention falls. The NZD (now ~$0.5887) also ticked up. The Q1 NZ jobs report was a little better than predicted with unemployment dipping to 5.3%. The positive trends, if they continue, might see the RBNZ begin to raise interest rates later this year.
For the third straight meeting the RBA tapped on the brakes with the latest 25bp increase moving the cash rate up to 4.35%. Because of underlying inflation pressures the interest rate ‘relief’ delivered last year has been unwound. Focus now is on whether the RBA moves settings further into ‘restrictive’ territory to win the inflation battle, or if the looming growth slowdown causes policymakers to ‘wait and watch’. According to the RBA, there are upside risks to inflation, but “policy is well placed to respond to developments”. We think another interest rate increase by the RBA is more likely than not over the next few meetings. But this will come at an economic cost. Under its baseline scenario, the RBA is projecting inflation to peak at ~4.8%pa in Q2, GDP growth to slow to an anemic ~1.3%pa by late-2026, and unemployment to drift up over the next two years.
For the AUD, outcomes compared to expectations matter. The interest rate curve is factoring in another ~33bps of tightening by next February. We feel it will be difficult for the RBA to be more ‘hawkish’ than that. By contrast, we don’t believe the unfolding step down in private sector activity because of fuel costs and higher interest rates have been accounted for. Nor have the global growth headwinds generated by the Middle East conflict. With positioning (as measured by CFTC futures) ‘net long’, and a lot of positives priced in (the AUD is tracking ~2% above our ‘fair value’ estimate), we feel upside potential in the AUD may be capped and there are more downside risks over the period ahead given its starting point. As a reminder, we think the higher level of Australian interest rates will support a higher average range for the AUD relative to the past few years, but not necessarily more AUD appreciation because of the worsening growth trajectory.
