Market Briefing: AUD continues to outperform
Renewed jitters. Skittish markets with participants wary the Middle East conflict might linger. Oil higher. USD index ticked up. AUD outperforms.
RBA hikes. ~70% chance RBA lifts rates next week with more than 2 moves baked in by year-end. A lot of positives may already be priced into AUD.
Global Trends
Markets have remained skittish with the situation in the Middle East still in a state of flux. Indeed, after a few positive sessions risk sentiment soured a bit overnight with wary participants skeptical about whether or when circuit breaking ideas previously floated will take hold. Swings in oil prices remain in the driver’s seat. Brent crude oil has risen ~5% over the past 24hrs towards ~US$93/brl despite the International Energy Agency agreeing to a coordinated release of ~400mn barrels from strategic reserves, the largest in history. However, other details are sketchy such as when each nation will tap reserves. And with ~20mn barrels of oil normally flowing through the Strait of Hormuz on a daily basis, the release would only alleviate supply constraints for a few weeks. Moreover, while President Trump continues to express a confident tone that the conflict will be resolved “very soon”, the reality on the ground and rhetoric from Iran paints a different picture.
Across markets, European equities lost ground overnight (EuroStoxx600 -0.6%) and the US indices were choppy. Bond yields extended their upswing with 10yr rates in the US, UK, and Germany rising ~7-13bps. As our chart shows, compared to a month ago, bond yields across the major nations have increased with the inflation jolt from higher oil prices generating an upward repricing in interest rate expectations. In the US core inflation held steady at 2.5%pa, but this was data for February. The oil impact will wash through the CPI data quickly over the next few months. Markets are now only fully factoring in another US Fed interest rate cut by December. In FX, the USD index ticked up with EUR slipping back (now ~$1.1567) and USD/JPY edging higher (now ~158.93, near the top of its 1-year range). Elsewhere, NZD drifted a bit lower (now ~$0.5913), while AUD outperformed again thanks to the shift in market thinking that the RBA could deliver another rate hike next week (now ~$0.7153).
As discussed over the past week, the situation in the Middle East is constantly evolving. We believe it is premature to assume things are nearing an end. There might be more twists and turns, with headline driven market volatility set to continue for a while. On balance, we think the US’ shift to becoming a ‘net energy exporter’ a few year ago means the higher level of oil prices (and a higher US terms of trade) may keep the USD in a relatively higher range than it was when oil was tracking down around US$60/brl at the end of 2025.
Global event radar: China Data (16th Mar), RBA (17th Mar), BoC (19th Mar), US Fed (19th Mar), BoJ (19th Mar), ECB (20th Mar)
Trans-Tasman Zone
The renewed jitters and volatility in oil/markets overnight have seen the NZD drift lower over the past 24hrs (now ~$0.5929). By contrast, the shift in RBA rate expectations has been an offsetting force for the AUD which has continued to outperform. At ~$0.7153 AUD/USD is near the top of the wide range it has occupied since early-2023. On the cross-rates the AUD has extended its climb with gains of ~0.4-1% recorded against EUR, JPY, GBP, NZD, CAD, and CNH. AUD/EUR (now ~0.6182) is near its highest point since November 2024, AUD/GBP (now ~0.5333) is around the top of its ~26-month range, AUD/NZD (now ~1.2096) is at a ~13-year peak, AUD/CNH (now ~4.9182) is tracking close to the upper bound of its ~4-year range, and AUD/JPY (now ~113.67) is near multi-decade highs.
As mentioned, the adjustment in RBA thinking has been an underlying AUD support. On the back of ‘hawkish’ rhetoric from RBA officials such as Deputy Hauser earlier this week, run of positive Australian data, and inflation risks due to the jump in oil prices, markets are factoring in a high chance another rate hike is announced on Tuesday and more tightening is delivered over coming months. Markets are assigning a ~70% chance of a 25bp rate rise next week with ~66bps worth of tightening discounted by year-end. It remains a matter of when, not if, the RBA raises rates again. The RBA’s experiment not to raise rates as far as others during the tightening cycle to support the jobs market failed, and it then moved too quickly last year with respect to cuts. Interest rate settings need to be more ‘restrictive’ than where they are to get inflation down to where it needs to be. There are clearly arguments for a rate hike next week but the RBA Boards cautious reaction function means it isn’t guaranteed and they may want to wait for more inflation data. AUD volatility around the RBA meeting looks likely given the elevated level of rate hike expectations.
Taking a step back, based on what’s now priced into the Australian interest rate curve, the lingering issues in the Middle East, and with the negative domestic economic consequences of higher mortgage rates set to manifest down the track, another RBA rate rise next week might not be the catalyst for that much more AUD strength, in our view. If anything, the AUD looks to have already run too far. The AUD is ~3% above our ‘fair value’ estimates, and above where yield/interest rate differentials suggest it should be (see chart below). The higher level of interest rates and wider yield spreads point to a higher average level for the AUD than what we saw the past few years, but not necessarily further AUD strength.
AUD & NZD event radar: China Data (16th Mar), RBA (17th Mar), BoC (19th Mar), US Fed (19th Mar), NZ GDP (19th Mar), AU Jobs (19th Mar), BoJ (19th Mar), ECB (20th Mar)
AUD levels to watch (support / resistance): 0.7080, 0.7110 / 0.7180, 0.7210
NZD levels to watch (support / resistance): 0.5850, 0.5890 / 0.5950, 0.5990
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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