Australian Dollar Retreats as Oil Shock and Rising Yields Take Hold

The Australian dollar enters the week under pressure around 0.7140-0.7150, having surrendered nearly one cent from last week’s highs. Renewed concerns over Middle East oil supplies and softer risk appetite are adding to the weakness, while overseas central bank decisions are expected to dominate trading. Australia’s calendar is relatively light, apart from RBA Governor Bullock’s testimony before Parliament on Friday.

Australian Dollar’s Methodical Rally Meets Resistance

Benign market conditions during the first half of last week saw the Australian dollar post incremental new session highs each day, reaching 0.7238 on Wednesday. Two hawkish messages from RBA Assistant Governor Hunter and Deputy Governor Hauser strengthened expectations for another rate increase and raised the prospect of a pre-emptive insurance hike on 29 September. Record-high copper prices also supported the currency’s bullish momentum.

The favourable backdrop developed within a well-defined 10-week rising channel that had lifted the Australian dollar by approximately US3.5 cents. Although the currency periodically tested the channel’s upper and lower boundaries, fresh catalysts continued to support it. These included stronger commodity prices, concerns about Federal Reserve credibility, doubts over the coherence of US Treasury policy and higher expectations for RBA rate increases.

Major Australian dollar crosses also reached new territory. AUD/EUR touched 21-month highs above 0.62, while AUD/NZD challenged the upper end of the 1.23 area, helped by a less aggressive RBNZ outlook.

Oil and Yields Push Back

Market conditions shifted by Thursday as investors began reacting to sharp increases in crude oil and US and global bond yields.

Iran-aligned Houthi forces in Yemen launched attacks on Saudi facilities and captured strategic islands near the Bab al-Mandab, a critical oil-shipping chokepoint. Saudi Arabia’s East-West pipeline, a key alternative route that diverts around four million barrels a day—roughly 4% of global supply—toward the Red Sea, is now offline. Efforts to establish a temporary shipping route through the Strait of Hormuz have also been delayed.

Brent crude surged nearly $10 a barrel on Thursday before reversing more than half of its gain on Friday. It was firm again at the start of the week, up $3.29 to $107.90 a barrel. The move pushed long-term US yields higher by nearly 20 basis points last week, leaving the 10-year yield close to 5%.

Higher oil prices improve Australia’s energy terms of trade, but the Australian dollar tends to trade as a risk-sensitive currency when an oil shock damages sentiment and raises concerns about global growth.

Australian Dollar Crosses Follow Separate Paths

Australian dollar crosses are moving at different speeds. AUD/EUR gave up the 0.62 level during the late-week AUD/USD selloff but retains most of its gains from the past two months at 0.6180. AUD/CAD remains near 0.99 and close to parity.

AUD/NZD also stayed firm, rising from below 1.20 in late August to a more than 13-year high of 1.2375 last week. Since the RBNZ raised rates on 2 September, its messaging has been less aggressive than the cycle of increases already priced into markets.

AUD/JPY has followed a separate path. The pair fell from 35-year highs near 115.00 on 28 August to around 110.00, largely reflecting the sharp reversal in USD/JPY. That move has been driven by repricing for faster BoJ rate increases and expectations that major foreign investors, including Japan’s Government Pension Fund Investment Corporation, will allocate more capital to domestic government bonds.

US Inflation Data Strengthens Fed Hike Case

US August CPI data released on Friday strengthened the case for a Federal Reserve rate increase this week. Core inflation rose 0.3% month-on-month, above expectations for a 0.2% increase. The figure fell short of the standard for declaring that inflation was clearly and rapidly moving toward 2%. Market pricing shifted from roughly a 65% chance of a hike to nearly 90%.

Australia’s fixed-income yields are also facing pressure. The country has healthier fiscal and public-debt metrics than most G10 peers, but inflation remains the dominant backdrop. Economic growth is close to its estimated 2% speed limit, while second-quarter household disposable income and spending were unexpectedly solid and an unprecedented data-centre build-out is underway.

Federal Reserve Moves Into Focus

Three major central bank meetings take place this week: the Federal Reserve, the Bank of Japan and the Bank of England.

Markets are widely expecting the Fed to raise rates by 25 basis points after August CPI failed to extend the nascent disinflation trend seen in June and July. Traders largely disregarded the fact that much of the upward surprise came from volatile categories and that portions of the price basket are now estimated statistically, raising data-reliability concerns. The Fed’s updated dot plot is expected to show higher projections, but will it endorse market pricing that implies another 92 basis points of increases by the end of 2027?

US Treasury Secretary Bessent will testify before the House Financial Services Committee on the international financial system. Such appearances are not normally a key market focus, but following recent coordinated yen intervention with Japanese officials and expanded liquidity operations intended to cap long-term US yields, this testimony could provide market-moving detail.

Will Ueda Confirm Market Expectations?

Another Bank of Japan rate increase is now considered almost certain. Markets have pulled forward expectations for a follow-up move and are pricing another 25 basis points before the end of the year. The key question is whether BoJ Governor Ueda validates that outlook. Officials across the policy spectrum have sounded increasingly determined to continue raising rates, but it remains unclear whether Ueda will accompany that stance with more hawkish forward guidance. The BoE is expected to hold rates while signalling a hawkish bias.

Australia’s event calendar is limited to RBA Governor Bullock’s parliamentary appearance.

Tuesday

• China August property prices, retail sales, industrial production and fixed-asset investment

Wednesday

• UK August CPI
• US FOMC rate decision, August retail sales and business inventories

Thursday

• New Zealand second-quarter GDP
• UK BoE rate decision

Friday

• RBA Governor Bullock parliamentary appearance
• Japan BoJ rate decision and August CPI

Source link