• Consolidation. Limited news flow constrained market moves. Oil ticked up, US equities dipped a bit. AUD tracked sideways after RBA held steady.
• Macro pulse. No change by RBA, but kept door open for more, if required. US CPI tonight. US inflation may trigger some vol. as rate expectations adjust.
Global Trends
There was little fresh geopolitical or economic news released overnight, hence market moves were rather subdued. Middle East headlines were mixed with the mediator between the US/Iran suggesting the two sides were “close to some sort of arrangement” over the Strait of Hormuz, yet at the same time US forces reportedly fired on a Panama-flagged vessel that tried to run the blockade of Iranian ports. Oil prices have edged up a bit further with brent crude back around US$89/brl (~21% above its 1-year average).
Elsewhere, US equities drifted back with the tech-focused NASDAQ (-0.6%) underperforming the broader S&P500 (-0.3%). Bond yields dipped slightly with US rates shedding ~2-3bps across the curve. In FX, the major currencies whipped around a fraction intra-day but on net there has been minimal change compared to this time yesterday. EUR is hovering near ~$1.1543, USD/JPY is north of ~159, NZD is tracking at ~$0.5880, and the AUD is close to ~$0.7060 after the RBA held interest rates steady at yesterday’s meeting.
Looking ahead, the July US CPI data is in the spotlight tonight (10:30pm AEST). US producer price inflation is out tomorrow, and monthly retail sales are due later in the week (Fri night AEST). Expectations of a September Fed rate rise have been pared back to ~48% with a full hike factored in by year-end and ~44bps of tightening discounted by mid-2027. We believe the risk is that the incoming US data shows inflation is gradually moderating, given the slack starting to appear in the labour market and as temporary factors which boosted prices recently fade, and for consumer spending to soften after a solid Q2. In our opinion, this type of combination might see markets further temper their near-term Fed rate rise expectations which in turn could exert downward pressure on the USD.
Trans-Tasman Zone
There was a modest intra-day swing in the AUD around the RBA meeting and press conference, but on net there has been little change compared to this time yesterday. This is in line with the minimal moves observed across markets over the past 24hrs (see above). At ~$0.7060 the AUD remains close to the upper bound of its ~6-week range and close to its ~6-month average. It is a similar story for the NZD which is tracking around ~$0.5880, just above its ~1-year average. The AUD has nudged up a fraction on most of the major crosses with gains of ~0.1-0.2% recorded against the EUR, JPY, GBP, NZD, and CNH.
In terms of the RBA, as expected, interest rates were left on hold at 4.35% for the second straight meeting. However, as we were anticipating, the RBA gave off ‘hawkish’ vibes and kept the door open to further rate rises, if required. According to the RBA headline inflation is “still too high” and trimmed mean “remains elevated”, but at the same time the economy is facing challenges. Australian GDP growth is projected to remain sluggish with a ~1.4-1.6%pa pace anticipated until mid-2028. The resultant negative spillovers into the jobs market and capacity created in the economy are predicted to dampen inflation over time. On the RBA’s numbers Australian inflation may have peaked in Q2, but the move to the midpoint of the target band could be gradual. Inflation is only forecast to edge down to 2.4%pa by 2028 with unemployment penciled in to lift to 4.8% over the cycle.
In terms of policy, Governor Bullock acknowledged a hike was discussed and that it is “quite possible” it may be needed down the track, with the RBA noting it could raise rates “if upside risks materialise”. In our mind, this ‘conditional’ tweak to the RBA’s guidance suggests the bar to it being delivered is higher than it was earlier in the year. Markets seemingly agree with ~18bps of further tightening by the RBA factored into the Australian interest rate curve by next March.
For the AUD, as mentioned previously, the positive impulse from the string of RBA rate rises earlier in the year is behind us. The RBA looks far closer to the end of its tightening phase while other central banks have room to run. The swing in relative interest rates could, in our view, constrain the AUD’s upside potential, though in the very near-term a softer US CPI report (10:30pm AEST) might see it tick up a bit further. But beyond short-term volatility, we believe medium-term macro headwinds for the AUD remain. The list includes the unfolding slowdown in the Australian economy, narrowing yield spreads, ongoing issues for global/Asian growth stemming from disruptions to energy supply, and lingering valuation worries/volatility across AI/tech stocks.
