• Upbeat vibes. Positive US/Iran rhetoric. Oil prices lower, US equities higher. USD on backfoot. Cyclical currencies like AUD & NZD outperform.
• Data pulse. US ADP employment & services ISM due tonight. US jobs report out later this week. Potential for renewed bursts of market volatility.
Global Trends
The more upbeat risk sentiment that came through at the end of July have continued over the past few sessions. US equities rose overnight with the ~1.8% gain in the S&P500 overshadowed by a ~2.6% lift in the tech-focused NASDAQ, its first back-to-back gain of 2% or more since April 2025. A drop in global bond yields (US rates fell ~5-6bps across the curve) generated by some slightly softer US job openings data and a decline in oil prices stemming from positive developments in the Middle East were factors at play. Brent crude oil tumbled ~6% to be back below US$79/brl, a low since mid-July and broadly inline with its 1-year average. When speaking US Treasury Secretary Bessent was optimistic talks with Iran were on the right track as he thinks “there is a chance we may have a deal today or tomorrow” to reopen the Strait of Hormuz. We have been down this road before, and as outlined previously simply opening the Strait does not mean energy flows revert to pre-conflict run-rates quickly because of things like damaged infrastructure, shipping capacity, insurances, and issues related to reservoir pressure.
In FX, the USD lost some ground, a reflection of the pull-back in US bond yields and lower oil prices given the USD’s correlation to energy price swings since the US switched to being a ‘net energy exporter’. The EUR (the major USD alternative) has edged up (now ~$1.1531), as has GBP (now ~$1.3452). USD/JPY also perked up a bit (now ~157.72) after last weeks rather sharp FX intervention driven falls. The ‘risk on’ vibes have supported cyclical currencies with the NZD (now ~$0.5894) and AUD (now ~$0.7046) rising. The AUD is tracking close to its ~6-month average.
Looking ahead, developments in the Middle East could continue to be in the drivers seat. More positive rhetoric may underpin sentiment, but we would also note we have been down this road before and talks might also just as easily break down once again. Macro wise, US ADP employment (10:15pm AEST) and the services ISM index (12am AEST) are due tonight with the monthly US jobs report on the radar later this week (Friday night AEST). We think signs the US economy/jobs market is doing ok without being great could see markets pare back some of their built up US Fed rate hike expectations, which if realised might drag on the USD. Markets are currently factoring in a ~60% chance the US Fed raises interest rates in September with ~43bps of tightening baked in by mid-2027.
Trans-Tasman Zone
The improved risk sentiment stemming from the Middle East related drop in oil prices and rebound in AI-related equities, combined with the downshift in the USD over the past week (which has been driven in part by the recent intervention to strengthen the JPY) has boosted the AUD and NZD (see above). At ~$0.7046 the AUD is at a multi-week high and close to its ~6-month average. It is a similar story for the NZD (now ~$0.5894) which has ticked above its ~1-year average. The backdrop has also generated support for the AUD on the cross-rates with gains of ~0.3-1.0% recorded against NZD, CNH, GBP, EUR, and JPY over the past 24hrs.
Data wise, the quarterly NZ jobs figures had a few surprises. On the one hand, jobs growth was better than anticipated with employment rising 1.2%pa, However, increased labour supply pushed up the unemployment rate to 5.6% (a high since 2015). The headline jump in the NZ unemployment rate may dampen the markets enthusiasm about further aggressive RBNZ rate hikes over the next few quarters. However, we are somewhat more encouraged by the job creation. And given the improved momentum in the NZ economy, we think employment growth might remain positive over the period ahead which may mean that a forward-looking RBNZ continues to lift interest rates in order to recalibrate policy settings out of ‘accommodative territory’ to a more ‘neutral’ stance. Over time, we believe rising interest rates and a solid growth pulse should support the NZD, particularly against the AUD given relative economic trends are turning in favour of NZ.
In Australia, household spending was better than anticipated in June (+0.8%mom). But a look under the hood indicates temporary factors might be at play such as a surge in imported electric vehicle purchases, a recovery in travel, and increased gambling outlays. We think the combined effects of higher interest rates on indebted households and step down in housing turnover (somewhat due to recent government tax changes) could create headwinds for household spending down the track. As mentioned before, we think the RBA is closer to the end than the beginning of its tightening cycle given the unfolding slowdown in the Australian economy. Markets agree with only ~16bps of further rate hikes by the RBA factored in by next February. On net, we believe lingering concerns about domestic growth, the shift in yield spreads, and potential for more volatility in asset markets because of renewed geopolitics or valuation worries suggest further AUD upside may be limited.
