Market Briefing: Middle East & RBA in focus this week
Market nerves. Higher oil prices & Middle East developments dampened risk sentiment on Friday. USD firmer. NZD & AUD underperform.
Macro events. Central banks in the spotlight this week. High chance of a RBA rate hike. But its not guaranteed. AUD volatility around the RBA likely.
Global Trends
Risk sentiment remained negative at the end of last week with the situation in the Middle East and jump in oil prices continuing to unnerve investors. The conflict is entering its third week and shows limited signs of letting up. The US continues to bolster its military presence in the region, Iran has stepped up attacks in the Strait of Hormuz, and over the weekend President Trump said he isn’t ready to make a deal while also claiming they want to negotiate a ceasefire (something Iran denied). With oil tankers still unable to cross the Strait (or unwilling to run the gauntlet) markets continue to bake in a hefty supply/risk premium in oil. Brent crude is at ~US$103.10/brl, ~76% above where it was in mid-December. The prospect of a prolonged period of elevated energy prices is raising the odds of a market unfriendly “stagflationary” environment (i.e. upside inflation and downside growth risks). Not helping matters on Friday was soggy US economic data. Q4 GDP growth was revised down, indicating the economy had less momentum than previously thought. Additionally US durable goods orders (a proxy for business investment) stalled in January, growth in consumer spending was tepid, and consumer confidence dipped further below average.
European and US equities shed ~0.4-0.9% with the S&P500 recording its third straight weekly fall (-1.6%), its worst run since March 2025. Bond yields extended their upswing with long-end rates in the US, Germany, and UK rising ~2-5bps. The benchmark US 10yr yield is now at ~4.28%, the upper end of its ~7-month range. On the back of the inflation pulse stemming from higher energy prices expectations for various central banks have shifted up over recent weeks with fewer US Fed rate cuts anticipated (the next Fed rate reduction isn’t priced in until March 2027) and rate hikes looked for by the ECB (factored in by July), Bank of England (by next February), Bank of Japan (by July), RBNZ (by September), and RBA. In FX, the USD’s revival continued with more gains recorded against the EUR (now ~$1.1423, a low since last August), GBP (now ~$1.3242), and USD/JPY (now ~159.60, the top of its ~20-month range). Cyclical growth-linked currencies like NZD (now ~$0.5791) and AUD (now ~$0.6994) underperformed.
As discussed over the past few weeks, the situation in the Middle East remains fluid and elevated oil prices (due to the US’ 'net energy exporter' status) combined with safe-haven demand is a supportive environment for the USD. Macro-wise, this week central banks will also be in the spotlight with the RBA (Tues), BoC (Weds night), US Fed (Thurs morning), BoJ (Thurs), BoE, and ECB (both Thurs night) meeting. Only the RBA is expected to act, however bouts of FX volatility are possible if other central banks like the US Fed hint at changes to their respective outlooks because of unfolding events and/or push back on the upward repricing in rate expectations that has occurred.
Global event radar: China Data (Today), RBA (Tues), BoC (Weds night), US Fed (Thurs morning), BoJ (Thurs), BoE (Thurs night), ECB (Thurs night), Global PMIs (24th Mar), China PMIs (31 Mar), EZ CPI (31st Mar)
Trans-Tasman Zone
The bout of risk aversion generated by the negative economic consequences of a sustained period of high energy prices, and USD strength, exerted more downward pressure on the NZD and AUD at the end of last week (see above). At ~$0.5791 the NZD is at the bottom of its ~2-month range, with the fact NZ is a “net energy importer” dragging on the NZD. NZ Q4 GDP (due Thursday) is likely to show a mechanical slowdown in quarterly growth however the annual run rate looks set to quicken. But, in the current environment, offshore forces/trends will remain the key NZD driver.
The AUD (now ~$0.6994) is ~2.7% below last week’s peak and back down near the lower end of its ~5-week range. The AUD also gave back more ground on the cross-rates with falls of ~0.4-1.0% recorded against EUR, JPY, GBP, CAD, and CNH on Friday. That said, if you take a step back, crosses like AUD/EUR, AUD/JPY, AUD/CNH, and AUD/GBP are still tracking near the upper end of their respective ranges. AUD/NZD remains around the top of its ~13-year range.
In Australia attention this week is on the RBA (Tues), with the monthly jobs report also due (Thurs). On the back of solid data, ‘hawkish’ commentary from RBA officials, and upside risks to inflation generated by the oil spike, chances of another rate hike being announced are sitting at ~65%, with 23 of the 32 economists surveyed looking for a move this week. It remains a matter of when, not if, the RBA acts again, with more than a fully rate hike assumed by the next meeting in May and ~71bps worth of tightening priced in by year-end.
AUD volatility around the RBA looks likely given elevated expectations. If the RBA surprises and holds fire its communication would be ‘hawkish’, acting to limit the knee-jerk dip in the AUD, while a rate rise might not be accompanied with guidance about another move (as has been the trend), which in turn can act to cap AUD strength. All up, we don’t think another RBA rate hike should be a catalyst for much more AUD upside. There is a lot of tightening now factored into the Australian interest rate curve, the issues in the Middle East look set to continue for some time, and the negative domestic economic consequences of higher mortgage rates and fuel costs, which are set to manifest over coming months, aren't discounted. For the Australian economy higher energy prices support the terms of trade and national incomes because of LNG exports. But for Australians already feeling the cost-of-living squeeze it is more of a negative shock. As a reminder, we believe the higher level of interest rates and wider yield spreads point to a higher average range for the AUD than what we saw the past few years, but not necessarily a lot more AUD appreciation this cycle.
AUD & NZD event radar: China Data (Today), RBA (Tues), BoC (Weds night), US Fed (Thurs morning), NZ GDP (Thurs), AU Jobs (Thurs), BoJ (Thurs), BoE (Thurs night), ECB (Thurs night), Global PMIs (24th Mar), AU CPI (25th Mar), China PMIs (31 Mar), EZ CPI (31st Mar)
AUD levels to watch (support / resistance): 0.6910, 0.6960 / 0.7050, 0.7140
NZD levels to watch (support / resistance): 0.5720, 0.5760 / 0.5830, 0.5880
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (16th March)
CNY Retail Sales (Feb) (1pm)
CNY Industrial Production (Feb) (1pm)
CNY Fixed Asset Investment (Feb) (1pm)
CAD CPI Inflation (Feb) (11:30pm)
USD Empire Manufacturing (Mar) (11:30pm)
TUESDAY (17th March)
USD Industrial Production (Feb) (12:15am)
USD NAHB Housing Index (Mar) (1am)
AUD RBA Decision (2:30pm)
AUD RBA Gov. Bullock Speaks (3:30pm)
EUR Germany ZEW Index (Mar) (9pm)
WEDNESDAY (18th March)
NZD Current Account (Q4) (8:45am)
JPY Trade Balance (Feb) (10:50am)
USD PPI Inflation (Feb) (11:30pm)
THURSDAY (19th March)
CAD BoC Decision (12:45am)
USD FOMC Decision (5am)
USD Fed Chair Powell Speaks (5:30am)
JPY BoJ Decision (no set time)
NZD GDP (Q4) (8:45am)
NZD RBNZ’s Richardson Speaks (10am)
AUD Jobs Report (Feb) (11:30am)
AUD RBA Financial Stability Review (11:30am)
GBP Jobs Report (Jan/Feb) (6pm)
GBP BoE Decision (11pm)
USD Initial Jobless Claims (11:30pm)
USD Philly Fed Outlook (Mar) (11:30pm)
FRIDAY (20th March)
EUR ECB Decision (12:15am)
EUR ECB Pres. Lagarde Speaks (12:45am)
NZD Trade Balance (Feb) (8:45am)
CAD Retail Sales (Jan) (11:30pm)
SATURDAY (21st March)
EUR ECB’s Nagel Speaks (4:30am)
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