Australia's goods trade flipped to deficit in March for the first time since 2017, blunting the RBA's third straight 25bp hike to 4.35% and muddying AUD/USD ahead of the Xi-Trump summit.
The Reserve Bank of Australia delivered its third consecutive 25-basis-point rate hike in an 8-1 decision, lifting the cash rate back to 4.35%, but the move did little to put a floor under the Australian dollar. Within hours, Governor Michele Bullock struck a notably more cautious tone than markets expected, and a separate data release showed Australia’s nominal goods trade surplus buckling into deficit in March for the first time since 2017. The two forces together are already retracing the initial bid the Aussie got from the hike, and the transmission chain is now moving through housing, consumer spending, and imported inflation in ways that complicate the classic "rate-up, currency-up" setup.
The Monetary Policy Board stated plainly that "the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices" and warned that "this is likely to have second-round effects on prices for goods and services more broadly." Inflation is now expected to remain above target for some time, and the board flagged the risk of price rises getting built into longer-term inflation expectations if the conflict widens or drags on. That hawkish language, however, got undercut by the governor herself. In a press conference after the decision, Bullock framed the last three hikes as providing some space for the board to assess how risks evolve – a deliberate pause signal. Chief Economist Luci Ellis later noted the dovish slant, acknowledging that the case for a June move is now more finely balanced.
For the currency, that shift matters. The staff forecasts that underpin the board’s thinking assume roughly one-and-a-half more rate hikes, with underlying inflation peaking at 3.8% year-on-year in the second quarter of 2026 and not returning to target until the end of the forecast horizon in June 2028. That profile still suggests two more hikes are coming, which would ordinarily widen the rate differential against a Federal Reserve on hold and support AUD/USD. But Bullock’s framing tells the market that the next hike is not a given. A central bank that is willing to pause while inflation is still running hot gets a smaller risk-premium bid. The immediate reaction in AUD/USD was a brief spike that almost fully reversed within the session – classic sell-the-fact behavior when the guidance lacks conviction.
The rate hikes already look to be having an effect on the housing market, and that transmission feeds directly into the domestic demand story that currency traders watch. National dwelling price growth slowed from a monthly pace of 0.6% in January to just 0.2% in April. The performance across capital cities is split: Sydney and Melbourne prices are now declining, while Brisbane, Adelaide, and Perth are still rising. A firming uptrend in dwelling approvals bodes well for future supply, but cost pressures stemming from the Middle East conflict will likely cause delays and second thoughts on projects planned but not commenced. For a currency sensitive to the housing cycle, a cooling property market undercuts the wealth-effect channel that has supported consumption and services inflation.
Consumer spending is also flashing caution. The ABS nominal household spending indicator bounced 1.6% in March on account of higher fuel costs, mirroring Westpac’s own card activity data. Stripping out price effects, real consumption is expected to gain just 0.6% in the first quarter, but outside of fuel and electricity – the latter buoyed by a rebate roll-off – the spending pulse looks faint. That speaks to a more challenging economic outlook taking hold, particularly in non-mining states where revenue constraints and higher expenses provide less scope for fiscal support. A fading consumer is not a friendly backdrop for a currency that already carries a significant current-account sensitivity.
And here is where the trade data lands. The nominal goods trade surplus buckled into a deficit in March, the first red ink since 2017. Higher fuel import costs, up 37.4%, and volatility in gold played important roles. But the chief culprit behind the surprise was a remarkable surge in data processing machine imports – up $2.9 billion or 300% in the month. While noisy and likely a wash for GDP, being offset by inventories or investment, this is clear evidence of the global AI investment drive reaching Australia’s shores. For the currency, though, a deficit printed when the RBA was supposed to be benefiting from a positive terms-of-trade shock raises questions about how much support the external sector still provides.
Offshore, markets have been pre-occupied by developments in the Middle East, and that risk pulse is transmitting straight into the dollar. At the beginning of the week, President Trump announced Project Freedom, an initiative to provide safe passage through the Strait of Hormuz to ships stuck in the Persian Gulf. As soon as the operation commenced, skirmishes were seen between the US and Iranian military, and UAE energy infrastructure was targeted. The dollar immediately caught a safe-haven bid, pushing AUD/USD lower even before the RBA decision.
Then the script flipped. The US did not retaliate, instead referencing an end to the offensive portion of the war. Within two days, Project Freedom was suspended indefinitely to make way for further intermediated negotiations. Reports suggest progress has been made, albeit without detail. Iran is arguably coming under greater pressure to make a deal, with China’s Foreign Minister emphasising the need for a quick end to the conflict and re-opening of the Strait while meeting his Iranian counterpart. The timing is not a surprise given that President Trump and President Xi are due to meet mid-month. A de-escalation scenario would lower oil prices, ease second-round inflation fears, and remove a portion of the dollar’s risk premium – all of which would support AUD/USD. But the situation remains binary: any flare-up would send the pair right back toward recent lows.
Back in the US, the week’s data did nothing to alter the Fed’s posture. The ISM services index for April eased slightly to 53.6, with the new orders index falling 7.1 points to 53.5 – slightly below its 10-year pre-Covid average – while the employment indicator rose 4 points but remained weak versus history. JOLTS job openings data and the ADP private payrolls release were broadly consistent with balance between labor demand and supply. ADP’s own Alpha Score of 38 out of 100, flagged as mixed on the AlphaScala platform, reinforces the sense that US labor market data is not yet tilting in a way that forces a dovish pivot. For the FOMC, this keeps the focus squarely on inflation risks. Guidance given by FOMC members this week was consistent with that view, leaving rate differentials roughly where they were: the Fed holding, the RBA potentially hiking again, but the path for both is now conditioned on the same oil-price and geopolitical variables.
The RBA’s rate path is now more sensitive to Middle East outcomes than the statement lets on. If oil prices spike again on renewed conflict, Australia’s import bill will widen further, more than offsetting any commodity-export windfall. If negotiations bear fruit and the Strait reopens, lower energy costs would ease the near-term inflation pulse and likely bring forward risk appetite. The Xi-Trump meeting mid-month is the next concrete marker; a joint statement endorsing a ceasefire framework would be the clearest signal yet that the dollar’s geopolitical bid is fading. Until then, the trade deficit and the governor’s cautious tone leave AUD/USD with an asymmetric setup – the easy upside that a hawkish RBA would normally provide is being eroded by a transmission chain that runs from housing to spending to net exports, all of which are softening just when the currency needs them most.
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