Market Briefing: Another RBA rate hike looming

• US/Iran. Markets take optimistic view. US equities at record highs. Oil dips on news US will guide 'some ships' through the Strait. AUD at top of its range.

• RBA meeting. Markets pricing in a 75% chance RBA hikes on Tuesday. RBA might struggle to be more 'hawkish' than predicted given the growth trajectory.

Global Trends

• It was a rather calm end to a hectic week in markets on Friday. US equities reached another record high (S&P500 +0.3%) and oil prices dipped. Elsewhere, bond yields consolidated and in FX there was limited net movement with the JPY holding on to its post Japanese intervention gains. The AUD (now ~$0.7217) continued to stand out and outperform its peers thanks to the mix of upbeat market vibes and elevated expectations the RBA could raise interest rates again on Tuesday. Markets are pricing in a ~75% chance the RBA hikes rates for the third straight meeting. A move is fully factored in by the June meeting, and ~65bps of tightening is baked in by next February.

• The conflict with Iran has entered its third month. Oil prices have been volatile and remain at elevated levels (see chart below), but to date, the drawdown of inventories has helped shield some of the potential impact on the global economy. However, things might be at an inflection point with oil executives reportedly cautioning that these buffers are nearing more critical levels. With that somewhat in mind, President Trump this morning announced that under “Project freedom” the US will begin to guide ‘some neutral’ ships through the Strait of Hormuz, and if this “humanitarian process is interfered with” it will be “dealt with forcefully”. US equity futures have risen a bit, and oil prices have shed more ground (brent crude is around ~$107/brl) with participants hopeful this is a signal more progress between the sides can be made over the period ahead.

• As mentioned previously, given the participants involved the situation in the Middle East is fluid and bouts of headline driven volatility should be anticipated for a while yet. The longer things continue as they are the greater the chances there is a steep slowdown in world growth given the disruptions to global energy supply and spillover impacts on supply chains. In addition to keeping an eye on Middle East developments, this week attention will also be on the RBA meeting (Tuesday), the NZ Q1 jobs report (Wednesday), and US labour market trends. Ahead of the April US non-farm payrolls report (Friday night AEST), the ISM services index, JOLTs Job openings figures (both Tues night AEST), and ADP employment (Weds night AEST) are due. US non-farm payrolls data has zig-zagged the past few months, and based on this pattern a softer read is predicted by analysts after the strong result last month (mkt +62,000). In our opinion, based on the signal from leading indicators and re-acceleration in US growth in Q1, the risks are tilted to the US jobs report coming in better than forecast. If realised, we believe this could reinforce thinking that the US Fed will stay on hold the next few months which in turn may give the USD a boost.

Global event radar: RBA (Tues), US Jobs (Fri), US CPI (12th May), US Retail Sales (14th May)

Trans-Tasman Zone

• The optimistic view taken by markets about the state of play in the US/Iran conflict, and reduced volatility because of holidays across Asia/Europe has helped the NZD hold up (now ~$0.5910) and the AUD perk up a little (now ~$0.7217). The AUD is at the top of the range it has occupied since mid-2022, with outperformance on the cross-rates also providing a helping hand. The AUD has risen by ~0.2-0.3% versus the EUR, JPY, GBP, NZD, CAD, and CNH. In level terms AUD/EUR (now ~0.6148) is approaching its year-to-date peak, AUD/NZD (now ~1.2211) is at a ~13-year high, AUD/JPY (now ~113.11) is close to its multi-decade top, and AUD/CNH (now ~4.9289) is near the upper end of its cyclical range.

• Expectations that the RBA will lift interest rates for the third straight meeting on Tuesday are high. Markets are pricing in a ~75% chance of another 25bp rate hike. It remains a matter of when, not if, the RBA acts again, with a rate rise fully factored in by the next meeting in June, and another ~65bps of tightening discounted by Q1 2027. Markets are assuming the RBA cash rate reaches ~4.75% by February. This is ~40bps above where the cash rate peaked in 2024.

• Given the stick inflation pulse in Australia, which will be compounded by global energy price developments, and still tight labour market conditions, we expect more RBA policy tightening to be delivered. However, markets (and the AUD) are driven by outcomes relative to expectations. With this in mind, we believe the RBA’s communication about future moves (assuming it announces another rate rise on Tuesday) might struggle to be more ‘hawkish’ that what it priced in. Moreover, we don’t believe the looming growth hit from petrol prices and interest rates have been accounted for, nor have the global growth headwinds generated by the Middle East conflict and spillover effects on supply-chains, particularly on activity across Asia. This could get more airplay by the RBA in its updated forecasts. Hence, we think there is a risk the AUD loses ground in a ‘buy the rumour, sell the fact’ type reaction post the RBA, particularly as positioning (as measured by CFTC futures) is already quite ‘net long’, and a lot of positives appear factored in (the AUD is tracking ~2% above our ‘fair value’ estimate).

AUD & NZD event radar: RBA (Tues), NZ Jobs (Weds), US Jobs (Fri), US CPI (12th May), US Retail Sales (14th May)

AUD levels to watch (support / resistance): 0.7080, 0.7140 / 0.7280, 0.7330

NZD levels to watch (support / resistance): 0.5830, 0.5860 / 0.5920, 0.5970

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

MONDAY (4th May)

AUD Job Ads (Apr) (11:30am)

AUD Building Approvals (Mar) (11:30am)

NZD RBNZ’s Gai Speaks (11:30am)

EUR ECB’s Simkus Speaks (5pm)

EUR ECB’s Dolenc & Villeroy Speak (7pm)

EUR ECB’s Kocher Speaks (10pm)

EUR ECB’s Guindos Speaks (10:15pm)

TUESDAY (5th May)

USD Factory Orders (Mar) (12am)

USD Fed’s Williams Speaks (2:50am)

EUR ECB’s Nagel Speaks (3:05am)

CAD BoC’s Macklem & Rogers Speaks (5:30am)

AUD Household Spending (Mar) (11:30am)

AUD RBA Decision (2:30pm)

AUD RBA Gov. Bullock Speaks (3:30pm)

EUR ECB’s Panetta Speaks (6pm)

USD Trade Balance (Mar) (10:30pm)

WEDNESDAY (6th May)

USD ISM Services (Apr) (12am)

USD JOLTS Job Openings (Mar) (12am)

USD Fed’s Bowman Speaks (12am)

EUR ECB’s Lane Speaks (1:40am)

USD Fed’s Barr Speaks (2:30am)

NZD RBNZ Financial Stability Report (7am)

NZD Jobs Report (Q1) (8:45am)

NZD RBNZ FSR Press Conference (11am)

EUR ECB Wage Tracker (6pm)

EUR ECB’s Lane Speaks (6pm)

EUR ECB’s Cipollone Speaks (6:40pm)

USD ADP Employment (Apr) (10:15pm)

USD Treasury Quarterly Refunding Announcement (10:30pm)

USD Fed’s Musalem Speaks (11:30pm)

THURSDAY (7th May)

USD Fed’s Goolsbee Speaks (3am)

CAD BoC’s Macklem & Rogers Speaks (6:15am)

AUD Trade Balance (Mar) (11:30am)

EUR Germany Factory Orders (Mar) (4pm)

EUR ECB’s Kocher Speaks (4:45pm)

EUR ECB’s Villeroy & Guindos Speak (5:15pm)

USD Challenger Job Cuts (Apr) (9:30pm)

USD Initial Jobless Claims (10:30pm)

EUR ECB’s Lane Speaks (10:40pm)

FRIDAY (8th May)

EUR ECB’s Schnabel Speaks (3am)

USD Fed's Kashkari Speaks (3am)

USD Fed’s Hammack Speaks (4:05am)

USD Fed’s Williams Speaks (5:30am)

JPY Labor Cash Earnings (Mar) (9:30am)

EUR Germany Industrial Production (Mar) (4pm)

EUR ECB’s Guindos Speaks (5:05pm)

USD Fed’s Cook Speaks (7:45pm)

USD Jobs Report (Apr) (10:30pm)

CAD Jobs Report (Apr) (10:30pm)

SATURDAY (9th May)

USD Uni. of Michigan Sentiment (May P) (12am)

USD Fed’s Goolsbee, Waller, Bowman, Daly Speak (9:30am)

CNY Trade Balance (Apr) (no set time)

*Note, all times/dates provided are AEST