Market Briefing: Bond blow up

• Risk off. Inflation worries from rising oil prices & a potential US diesel export ban generated another jump in bond yields. USD firmer. AUD & NZD weaker.

• Global forces. Australian jobs data due today. But global forces more in focus for the AUD. RBA likely to hike next week but growth slowdown is looming.

Global Trends

• Global markets hit an air pocket overnight. A combination of factors we have been calling out such as disruptions to refined petroleum products, renewed inflation worries, rising bond yields, and the negative implications for global activity down the track generated a bout of risk aversion. Bond yields jumped again with 10yr rates in the US, UK, and Germany rising ~9-15bps. There were chunky moves across yield curves with the US 5yr yield climbing ~17bps to 5% for the first time since 2007. The US 10yr is also around levels last traded before the GFC. Over in Europe, the French-German 10yr spread has reached ~110bps for the first time since the European debt crisis in 2012.

• Lingering concerns about the US/Iran conflict saw brent crude prices rise ~5% to US$103.30/brl. Iran’s President told the UN they would not allow freedom of navigation through the Strait of Hormuz while sanctions and a US naval blockade were in place. At the same time, reports that the US might introduce a ~90-day ban on diesel exports generated turbulence. As our chart shows, US retail petrol and diesel prices have risen substantially, and this is creating discomfort for consumers and businesses, while politicians no doubt have the looming US mid-term elections in their sights. We doubt the moves will have the desired effects, and indeed if implemented it could create unintended consequences. Global fuel prices may increase even further as a scramble for supply unfolds. Moreover, Latin American nations are reliant on US diesel imports. A reduction in availability (and higher prices) might flow through to fuel and farming costs, which could push up US food prices given it brings in a lot of its agricultural produce from the region.

• Europe, as well as other ‘net energy importers’ such as NZ are exposed to the potential higher inflation/slower growth consequences. Markets have rushed to factor in close to 5 more rate hikes by the ECB over the next year, ~116bps of tightening by the RBNZ over the same period, another ~3 RBA increases by next September, and ~3 additional moves by the US Fed by next April. Better than expected US PMI data reinforced the outlook for tighter monetary policy being required, and Fed rhetoric was ‘hawkish’. Fed Governor Barr said further increases are likely needed to bring down inflation, echoing Chicago Fed President Goolsbee’s comments earlier this week. Elevated bond yields and the higher cost of capital weighed on equities with the S&P500 shedding ~0.8%. The tech-focused NASDAQ underperformed (-1.1%). In FX, the USD strengthened with EUR (now ~$1.1385) touching its lowest point since late-July, while USD/JPY edged up (now ~158.30). NZD fell ~1% (now ~$0.5674, near its lowest since early-July), and the AUD lost ground (now ~$0.7040, a multi-week low). We remain of the opinion that the outlook for further US Fed policy tightening, elevated oil prices (given the US’ status as a ‘net energy exporter’), and fragile risk sentiment may support the USD over the near-term.

Global event radar: RBA (29th Sep), China PMIs (30th Sep), US PCE (30th Sep), JP Tankan (1st Oct), EZ CPI (2nd Oct), US Jobs (2nd Oct)

Trans-Tasman Zone

• The stronger USD, on the back of the shaky risk sentiment stemming from energy-related inflation worries and rising bond yields, has weighed on the AUD and NZD over the past 24hrs (see above). NZ’s status as a ‘net energy importer’ also looks to have been a factor at play that has dragged the NZD (now $0.5674) to around its lowest level since early-July. At ~$0.7040 the AUD is also at a multi-week low, with the AUD also weakening on the major cross-rates. The AUD declined by ~0.5-0.9% against EUR, JPY, CAD, and CNH, while there were smaller falls against GBP (-0.3%) and NZD (-0.1%).

• Today the volatile monthly Australian jobs data is released (11:30am AEST). After a weak showing last month employment is forecast to rebound in August (mkt +20,000) with the unemployment rate projected to hold steady at ~4.5%. This type of result would mean that labour market conditions remain too tight for comfort and could reinforce the case for a RBA hike next week (markets are factoring in a ~89% chance of a move, with close to ~3 rate rises discounted over the next year). As outlined by RBA Governor Bullock earlier this week an unemployment rate between 4.5-5.0% “will probably take enough heat out of the labour market” to help “ease pressure on inflation”. Histroy and the experiences offshore show that more slack in the economy and a higher unemployment rate is the price that needs to be paid to break the back of inflation.

• That said, barring an outsized surprise, we doubt the Australian data will generate a lasting impact on the AUD given the global themes and burst of risk aversion running through markets. The broader global backdrop is inline with our long-held views that medium-term upside potential in the AUD could be limited, and that there are more downside than upside risks over the near-term. As mentioned before, we believe elevated oil prices (given the US is a ‘net energy exporter’) can be USD supportive, as should the prospect of another couple of US Fed rate hikes over the next few months, and more bursts of market volatility. On the AUD side, we feel the outlook for higher RBA interest rates is well baked in (there is ~73bps of tightening priced in by Q3-2027). However, the local growth challenges created by rising mortgage costs, elevated fuel prices, and housing downturn may not (yet) be fully appreciated. Added to that, FX is a relative price. While the RBA looks set to raise interest rates further, other central banks could have more work to do more, hence yield differentials may gradually shift against the AUD, in our opinion.

AUD & NZD event radar: AU Jobs (Today), RBA (29th Sep), AU CPI (30th Sep), China PMIs (30th Sep), US PCE (30th Sep), JP Tankan (1st Oct), EZ CPI (2nd Oct), US Jobs (2nd Oct)

AUD levels to watch (support / resistance): 0.6960, 0.7020 / 0.7090, 0.7140

NZD levels to watch (support / resistance): 0.5620, 0.5640 / 0.5740, 0.5790

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

THURSDAY (24th September)

JPY PMIs (Sep P) (10:30am)

AUD Jobs Report (Aug) (11:30am)

EUR Germany IFO (Sep) (6pm)

USD Fed’s Williams Speaks (2026 voter) (6:10pm)

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