The Australian dollar jumped 0.85% to 0.7180 as USD weakness from Bessent's bond buybacks and Iran sanctions drove the rally. Focus shifts to RBA CPI and Jackson Hole.
The Australian dollar’s steady climb turned into a sprint on Friday. It jumped 0.85% to fresh cycle highs near 0.7180, moving into the high 0.71s in just a few sessions. Unlike the Jan/Feb rallies, this one is not driven by a hawkish RBA or stretched positioning. Instead, support comes from a weaker USD, rising gold prices, strength across Asian currencies and Australia’s mining dividend season.
Treasury Secretary Scott Bessent’s announcement to expand Treasury bond buybacks, combined with escalating sanctions rhetoric towards Iran, reinforced concerns about the long-term outlook for the US dollar. That helped push AUD/USD to new highs.
A busy week lies ahead. Australia’s July CPI, RBA August meeting minutes and key GDP partials are due. But they are likely to play second fiddle to Fed Chair Warsh’s keynote speech at the annual Jackson Hole Symposium.
US bond yields have climbed sharply since March, with the 30-year bond yield reaching highs not seen since 2007. That came despite softer payrolls data and moderating inflation, which would normally support lower yields.
Bessent announced plans to double bond buybacks last week. That alleviated some immediate pressure on long-dated yields. But it was very short-lived. The intervention raises questions about being drawn into an escalation cycle, the sustainability of the efforts and potential success. Many commentators note that this action does not address the root cause of what ails long-term US sovereign bonds – large fiscal deficits and still high inflation.
Bessent stated that the Treasury holds an extensive “toolkit” to keep yields contained. But investors are clearly demanding a higher risk premium to hold US assets amid ongoing geopolitical tensions, uncertainty around the future direction and independence of the Fed, and rising government debt. US public debt reached more than $40 trillion for the first time, increasing by a third in less than five years.
Gold and Bitcoin both rallied as investors sought alternatives to US assets. The dollar index traded to a multi-month low of 98.55. While off last week’s lows, DXY remains under the 99-handle on Monday afternoon.
The Australian dollar starts the week holding onto Friday’s gains, sitting above 0.7160. Crosses were mixed: AUD/NZD is down 0.36% on the week near 1.1990, AUD/JPY up 0.8% around 113.90, and AUD/EUR flat at 0.6130.
The US Administration has pivoted to economic sanctions around isolating Iran and forcing concessions. Bessent is due to announce details of the strengthened sanctions regime on Monday, including penalties on countries that help Iran evade sanctions. Oil prices declined earlier today by more than 1%, with investors taking profits ahead of the announcement.
Australia’s labour market showed further signs of cooling in July. Employment declined, the unemployment rate edged up to 4.5%, and hours worked softened, suggesting businesses are reducing hours rather than headcount. Conditions remain resilient overall, but labour supply continues to outpace employment growth, pointing to a gradual increase in spare capacity. Wage growth also remained contained in Q2, with annual growth slowing to 3.2% as private sector wage pressures eased.
China’s economy lost momentum in July, with industrial production, retail sales and investment all slowing. The ongoing weakness in the property sector continues to weigh on growth, adding to expectations that policymakers may need to deliver further stimulus.
Fed Chair Warsh will give his first speech at the Kansas City Fed’s annual Jackson Hole Symposium. The topic this year is “Financial Innovation: Implications for Payments and Policy”, which does not lend itself to monetary policy commentary.
Bessent will unveil “a new fiscal initiative” this week too, but this likely does little to reassure investors. US deficits are structural and there is no legislative path or will to address this. Some analysts say the move could be counterproductive.
Locally, attention will centre on July inflation data. Markets expect annual inflation to continue easing, with lower electricity prices helping offset higher travel and fuel costs. Consensus expects July trimmed mean CPI to print at 3.5% year on year.
Governor Bullock told reporters at the August press conference that the Board discussed the case for a hike. The RBA minutes will offer more insight.
Q2 GDP building blocks – private CAPEX and construction work done – are due this week and can shift the dial for Q2 GDP, due September 2. After punchy Q1 increases in CAPEX and construction work done, driven by data centres, forecasters anticipate more moderate profiles for Q2.
NVIDIA’s Q2 earnings also feature this week. The stock trades at $214.72, down 0.98% on the day, with an Alpha Score of 68/100. A range of central bank speakers round out the calendar.
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