Market Briefing: Middle East tensions re-emerge

• Risk wobbles. US/Iran tensions push oil higher. US yields rose, equities slip back, USD consolidated. AUD hovering just below ~US$0.70.

• AU jobs. Monthly jobs data due today. Labour demand indicators have softened. Underwhelming report could raise doubts RBA may hike again.

Global Trends

• A few renewed bouts of market volatility over recent days, albeit relatively modest compared to what has occurred at times this year. Ongoing skirmishes between the US and Iran has dampened the mood and propelled oil prices higher (brent crude is back above ~US$94/brl for the first time since early-June, ~34% above this month’s low point). The latest US bombing campaign against Iran has entered its 11th day, and Iran continues to retaliate by attacking the US’ Gulf region allies. Based on comments from both sides the risks reside with the situation getting worse before it improves. As discussed previously, prolonged disruptions to energy shipped via the Strait of Hormuz, coupled with elevated prices, are headwinds for the global economy, and this typically isn’t a supportive environment for risk sentiment.

• Against the backdrop of higher oil/energy prices, US bond yields continued to edge higher. At ~4.65% the US 10yr yield is close to the upper end of its ~18-month range, while the monetary policy expectations driven US 2yr rate is at levels last traded in February 2025 (now ~4.30%). Markets are factoring in a US Fed rate rise by the September meeting, with 2 hikes fully discounted by next March. The backdrop also exerted a bit of downward pressure on equities with the tech-focused NASDAQ (-0.6%) underperforming the broader US market (S&P500 -0.1%). Jitters about the path forward for AI-related stocks, which have risen a lot over the past year, also remain in place. Alphabet dropped in late trading after it lifted its capital expenditure forecasts. Investors are starting to focus on the return on invested capital rather than just headline grabbing news about AI development.

• In FX, the USD consolidated with EUR hovering just above ~$1.14 ahead of tonight’s ECB meeting (10:15pm AEST). No change in rates is expected but ‘hawkish’ rhetoric is looked for. USD/JPY (now ~163.13) reached a fresh multi-decade peak with participants continuing to take comments by Japanese officials about possible further FX intervention and reports the BoJ might raise interest rates at a faster pace in their stride. The NZD (now ~$0.5815) is tracking around its 1-year average and the AUD (now ~$0.6993) has been in a holding pattern with the monthly Australian jobs data out today (11:30am AEST). We believe the shaky risk backdrop, elevated US interest rate expectations, and higher oil prices can be USD supportive in the near-term given the shift in yield differentials and the US’ standing as a ‘net energy exporter’. However, there could also be push-pull forces washing through with the prospect of the ECB flagging more rate hikes down the track and/or a reversal in the JPY (which appears very stretched compared to underlying fundamentals) potentially working the other way.

Global event radar: AU Jobs (Today), ECB (Tonight), Global PMIs (Fri), US Fed (30th July), BoE (30th July), US GDP (30th July), BoJ (31st July), China PMI (31st July), EZ CPI (31st July)

Trans-Tasman Zone

• Wobbles in risk sentiment, as illustrated by the dip in US equities and jump in oil, stemming from developments in the Middle East, coupled with an upward shift in US rate expectations have generated headwinds for the AUD and NZD (see above). At ~$0.5815 the NZD is just shy of its 1-year average, and the AUD (now ~$0.6993) is a little below the midpoint of its ~6-month range. The AUD also drifted back a fraction on most of the major crosses with falls of ~0.1-0.2% recorded against the EUR, JPY, GBP, and CAD. Taking a step back, AUD/EUR (now ~0.6129) has edged higher so far this month, however we believe it could be a more challenging path forward and it is at risk of weakening over the period ahead, particularly as it is running above where our ‘fair value’ model suggest it should be. Tonight the ECB may stress more hikes are in the pipeline (10:15pm AEST), the Australian jobs data could underwhelm (see below), and there has been a tendency for AUD/EUR to fall over August (over the past 15yrs AUD/EUR has declined 11 times in August).

• Today in Australia, the jobs report, which can be volatile month to month, is due (11:30am AEST). The interest rate rises delivered by the RBA earlier this year, combined with global uncertainty and higher fuel costs, appear to be gaining traction across the Australian economy. As shown, our labour demand index, which incorporates forward looking inputs such as job ads and hiring intensions, has stepped down. After a solid rebound in May we believe there is a risk the June jobs data shows widening cracks in the labour market. If realised, this could see markets pare back expectations looking for further RBA tightening, which in turn may weigh on the AUD. We believe the RBA is closer to the end than the beginning of its cycle, although markets have become less sure with another ~23bps of hikes now discounted by next March. On net, we continue to think that the shift in relative interest rate differentials against the AUD, coupled with the slowdown in Australian growth and/or challenges faced by the Asian economy from prolonged disruptions to energy/supply-chains mean there are more headwinds than tailwinds for the AUD over the near-term.

• Across the Tasman, Q2 NZ CPI released earlier this week showed price pressures are elevated. Headline inflation accelerated to 4.1%pa, with fuel costs a driver. However, a look under the hood finds there was more to it and that underlying trends are broadening. We think this should see the RBNZ deliver another rate hike in September, and that a steady steam of increases could follow. Markets are factoring in ~100bps of tightening by the RBNZ by next June. Over time, we feel the improving NZ economy and rising NZ rates should be NZD supportive and that diverging trends could see AUD/NZD (now ~1.2026) lose ground.

AUD & NZD event radar: AU Jobs (Today), ECB (Tonight), Global PMIs (Fri), AU CPI (29th July), US Fed (30th July), BoE (30th July), US GDP (30th July), BoJ (31st July), China PMI (31st July), EZ CPI (31st July)

AUD levels to watch (support / resistance): 0.6890, 0.6950 / 0.7030, 0.7070

NZD levels to watch (support / resistance): 0.5730, 0.5790 / 0.5840, 0.5890

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

THURSDAY (23rd July)

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

SGD CPI Inflation (June) (3pm)

EUR ECB Decision (10:15pm)

CAD Retail Sales (May) (10:30pm)

USD Initial Jobless Claims (10:30pm)

EUR ECB Pres. Lagarde Speaks (10:45pm)

FRIDAY (24th July)

AUD PMIs (July P) (9am)

JPY CPI Inflation (June) (9:30am)

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

GBP Retail Sales (June) (4pm)

EUR France PMIs (July P) (5:15pm)

EUR Germany PMIs (July P) (5:30pm)

EUR PMIs (July P) (6pm)

GBP PMIs (July P) (6:30pm)

USD PMIs (July P) (11:45pm)

*Note, all times/dates provided are AEST