Market Briefing: Will the US Fed rattle markets?

• Risk wobbles. Higher oil prices & rising bond yields dampen sentiment. USD firmer. AUD & NZD drift back. AUD ~1.5% from last weeks peak.

• US rates. US Fed in focus with a hike expected tomorrow (4am AEST). But Fed may struggle to be more 'hawkish' than what is priced. USD volatility likely.

Global Trends

• Cyclical assets remain on the backfoot with the combination of higher oil prices (brent crude has edged up towards ~US$109/brl, levels last traded in mid-May with the re-escalation in the US/Iran conflict showing no signs of improvement) and rising bond yields dampening sentiment. The inflation impulse from the upswing in oil, demand/supply imbalance created by elevated government debt (which will be mechanically added to by rising interest costs), crowding out by the AI CAPEX funding drive, and central bank rate hike expectations is pushing up yields. The benchmark US 10yr (now ~5.00%) is around the top of the very wide range it has occupied since 2007, while long-end rates in other countries like Japan, the UK, Germany, and Australia also touched multi-year highs. At ~3.04% Japan’s 10yr yield is in a region it last traded in 1996 with reports the government is considering a new defence spending target of ~3.5% of GDP adding to worries about borrowing.

• The backdrop saw US and European equities dip with the S&P500 shedding ~0.5% and the tech-focused NASDAQ underperforming (-0.8%). In FX, the USD ticked up with EUR slipping towards the bottom of its 1-month range (now ~$1.1544) and USD/JPY nudging up (now ~155.07). The AUD drifted back (now ~$0.7133) to be ~1.5% from last weeks peak, and the NZD continues to languish near ~2-month lows (now ~$0.5759) with NZ’s status as a ‘net energy importer’ and thoughts the RBNZ might not be as ‘hawkish’ as what was assumed compounding the firmer USD. Mixed signals from yesterday’s China data batch, which showed a ‘K-shaped’ divergence between sluggish consumer activity (retail sales moderated to 0.4%pa) and an export supported recovery in industrial output (industrial production quickened to 5.2%pa) was also at play.

• Tonight US retail sales (10:30pm AEST) and the Fed decision/press conference (4am/4:30am AEST) will be in the spotlight. A rebound in US consumer spending is looked for in August, with the pick up in the US data pulse and firmer inflation underpinning expectations that the US Fed could deliver a 25bp rate rise tomorrow (the Fed's last move was a rate cut in December 2025). Our policy-rule based models suggest the US Fed may need to hike ~2-3 times over the next ~6-months. But unlike the US Fed, markets are already pricing more than that in with a move tomorrow assigned a ~92% chance and ~95bps worth of hikes discounted by Q3 2027. Given the amount of tightening already factored in, and new Chair Warsh’s dislike of ‘forward guidance’ we believe it might be difficult for the Fed to be more ‘hawkish’ than what is baked in. A burst of volatility is likely post the Fed announcement, and we see risks the USD weakens after the event.

Global event radar: US Retail Sales (Tonight), US Fed (Thurs morning), BoE (Thurs), BoJ (Fri)

Trans-Tasman Zone

• Still shaky risk sentiment, as shown by another dip in equities generated by rising oil and elevated bond yields, exerted more downward pressure on the AUD and NZD overnight (see above). At ~$0. 5759 the NZD is near ~2-month lows with NZ’s ‘net energy importer’ status and questions over how many more rate hikes the RBNZ might deliver this cycle compounding the firmer USD. The AUD (now ~$0.7133) is ~1.5% below last weeks peak, although it has held up better on the crosses the past 24hrs with modest gains coming through versus the JPY (now ~110.60) and NZD (now ~1.2385, the upper end of the range it has traded the past ~13.5 years).

• The USD will be in the AUD and NZD driver’s seat over the next few sessions with US retail sales (10:30pm AEST) and the US Fed meeting (4am AEST, press conference 4:30am AEST) in focus. As discussed above, a rate hike by the US Fed (which would be the first move since it cut rates last December) appears likely given the US inflation pulse and upside risks developing. However, that is already largely priced in with a move tomorrow viewed as a ~92% chance and ~95bps of tightening by the US Fed factored in over the next year. As mentioned, we believe there could be a burst of market and USD volatility around the US Fed meeting given the amount of rate hikes already baked in and because new Chair Warsh dislikes providing ‘forward guidance’. While we think more US Fed rate rises are probable down the track, the lack of a firm commitment from Chair Warsh may disappoint ‘hawkish’ market expectations. In our view, this in turn could see the USD fall and the AUD (and NZD) spike a bit higher after the event.

• That said, we don’t expect this type of knee-jerk reaction to last too long and/or extend too far. The macro backdrop in the US points to more ‘restrictive’ Fed policy being required. Elevated oil prices should also be USD supportive given the US’ position as a ‘net energy exporter’, as would be more wobbles in risk assets. Moreover, when it comes to the AUD, given what is factored into the local interest rate curve (a late-September RBA hike is assigned a ~80% chance and ~71bps of tightening is discounted by Q3-2027), the unfolding stepdown in local growth due to rising mortgage costs and housing shake out, and outlook for other central banks to deliver more than the RBA from here, medium-term upside potential appears constrained, in our opinion.

AUD & NZD event radar: US Retail Sales (Tonight), US Fed (Thurs morning), NZ GDP (Thurs), BoE (Thurs), BoJ (Fri), RBA Gov. Bullock (Fri)

AUD levels to watch (support / resistance): 0.7030, 0.7080 / 0.7180, 0.7240

NZD levels to watch (support / resistance): 0.5690, 0.5730 / 0.5800, 0.5850

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

WEDNESDAY (16th September)

JPY Trade Balance (Aug) (9:50am)

GBP CPI Inflation (Aug) (4pm)

EUR ECB Wage Tracker (6pm)

EUR Industrial Production (July) (7pm)

EUR ECB’s Vujcic Speaks (10:15pm)

USD Retail Sales (Aug) (10:30pm)

USD Import/Export Prices (Aug) (10:30pm)

THURSDAY (17th September)

USD NAHB Housing Index (Sep) (12am)

USD FOMC Decision (4am)

USD Fed Chair Warsh Speaks (4:30am)

NZD GDP (Q2) (8:45am)

EUR ECB’s Lane Speaks (5pm)

EUR ECB’s Rehn Speaks (8pm)

GBP BoE Decision (9pm)

USD Philly Fed Index (Sep) (10:30pm)

USD Initial Jobless Claims (10:30pm)

FRIDAY (18th September)

NZD Trade Balance (Aug) (8:45am)

AUD RBA Gov. Bullock Speaks (9:30am)

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

JPY BoJ Decision (no set time)

GBP Retail Sales (Aug) (4pm)

EUR ECB Pres. Lagarde Speaks (8:30pm)

USD Industrial Production (Aug) (11:15pm)

USD Fed’s Bowman Speaks (11:30pm)

SATURDAY (19th September)

USD Leading Index (Aug) (12am)

USD Fed’s Schmid Speaks (1:45am)

*Note, all times/dates provided are AEST