US
Brent crude oil prices surged by nearly 8% since yesterday to $90 a barrel, lifting global bond yields and USD while weighing on equity markets. Confidence the Strait of Hormuz re-opens anytime soon is fading as the US hardened its position by attaching deal-breaking negotiating conditions on Iran.
We see crude oil prices driving the war narrative, with price swings likely to dictate the pace of escalation and de-escalation. That should keep Brent crude oil prices within a broad $70 to $100 range.
Unsurprisingly, energy-sensitive NOK is the outperforming FX outlier. USD/JPY is consolidating yesterday’s gains, having retraced 50% of its intervention-driven drop since July 30. The idea the Bank of Japan (BOJ) needs to tighten more aggressively to strengthen JPY is only part of the story.
US-Japan rate spreads have already narrowed in favor of JPY, and we see room for further compression. The BOJ’s policy rate is near the lower end of its neutral range estimate (1.10%-2.50%) while Japan’s economy is operating above potential. In contrast, Fed policy is restrictive (assuming a neutral rate of 3.00%) and the economy is operating around potential.
The bigger obstacle to JPY gains is the spikes in crude oil prices. Until crude retreats, FX intervention can contain USD/JPY upside but not force a sustained move lower. USD/JPY next major resistance is offered at 160.00.
Today, second-tier US economic data is on deck: July NFIB small business optimism index (11:00am London, 6:00am New York), ADP private employment change for the week ending July 25 (1:15pm London, 8:15am New York), July existing home sales (3:00pm London, 10:00am New York).
AUSTRALIA
RBA delivered a less hawkish hold. As was widely expected, the RBA kept the policy rate at 4.35% for a second straight meeting. The decision was unanimous, with the Board judging policy to be “somewhat restrictive” and noting that “labour market conditions have eased by a little more than expected in recent months.”
The RBA softened its hawkish bias. It reiterated that “inflation is still too high”, adding that “risks to inflation are judged to be skewed to the upside.” But the guidance was tempered at the margin with the Board now prepared to “increasing the cash rate further if upside risks [to inflation] materialise”, rather than simply “if needed” previously.
Indeed, the RBA’s updated forecasts raised the bar for another hike. The RBA raised its unemployment rate projection across the forecast horizon and lowered its policy-relevant trimmed mean inflation projections through June 2027.
AUD/USD dipped briefly following the policy decision but recovered most of the losses during RBA Governor Michele Bullock’s press conference. Bullock highlighted it was “quite possible” that a further rate hike would be needed, pointing out that Australia’s economy is still operating above capacity.
Bottom line: attractive carry alongside Australia’s strategic exposure to commodities linked to energy, AI, and defense remain key AUD tailwinds.
