Hopes for a rebound in the Australian dollar are hanging by a thread after US President Donald Trump reinstated a blockade through the Strait of Hormuz and traders ramped up their bets for a US interest rate rise later this month.
The Aussie, which is often traded as a proxy for risk, sat at US69.2¢ on Tuesday, having been stuck below US70¢ since late June. After climbing to as high as US69.7¢ at the end of last week, it was swiftly sold off again.
The shift came after fresh strikes between Iran and the US prompted Trump to impose a 20 per cent toll on cargo passing through the strait, a vital waterway for roughly 20 per cent of the world’s energy supply.
The flare up has stoked fears of another energy price-driven inflation spike, which would prime the US Federal Reserve to make good on its recent hawkish pivot and increase borrowing costs in the world’s largest economy.
Westpac’s head of FX strategy Richard Franulovich said he expected the Fed to keep rates on hold this month, but conceded that recent developments, including those in the Middle East, had left his “views hanging on by the thinnest of threads”.
“If we can navigate the next six months without the Fed having hiked, then there’s another important pillar of support for Aussie,” he said, before adding that “a lot has to hang together” for currency to return to the US71¢ to US72¢ range it was trading in earlier this year.
Monetary policy is key to foreign exchange because higher rates of return attract foreign investors, who in turn buy the local currency. This worked in the Australian dollar’s favour earlier in the year after three rapid fire interest rates rises from the Reserve Bank of Australia to tackle a pick-up in prices.
But cooling inflation data has tempered expectations for further rate increases, with bond traders now pricing in a roughly 25 per cent chance of a rate rise next month.
Franulovich said the Aussie could still get a lift if the RBA delivered another “hawkish hold” as they did in the June meeting, when governor Michele Bullock left the cash rate on hold but did not rule out further tightening.
“The RBA is going to be stoically hawkish for a lot longer, it’s in no mood to validate markets that are pricing the risk of cuts next year,” Franulovich said. “That’s a little bit of good news for the Aussie too.”
‘Not an option’
Meanwhile, the Fed has taken an unexpectedly hawkish pivot under new chairman Kevin Warsh, who was joined overnight by governor Christopher Waller in taking a tough stance on inflation.
“Sternly staring at inflation until it melts before our withering gaze is not an option,” said Waller, adding that the Fed must consider raising rates if the US inflation report on Tuesday night (AEST) came in hot.
Bond markets were quick to respond and upped their bets for higher US rates this year, including a 50 per cent chance of a move higher this month. Those bets could ramp up – and push the Aussie dollar even lower – if tonight’s core consumer price index, which strips out volatile price moves, beats forecasts.
The Australian dollar could “come under further pressure if tonight’s US June core CPI beats [expectations], prompting investors to further price in the possibility of a July rate increase,” said Commonwealth Bank currency strategist Carol Kong.
She noted that Waller’s comments had already heaped pressure on the Aussie.
“Renewed tensions between the US and Iran, together with disruptions to shipping through the Strait of Hormuz, are additional headwinds as they will boost safe haven demand for the US dollar and weigh on broader risk sentiment.”
Businesses polled by Kong and other CBA foreign exchange strategists tipped the Australian dollar to climb above US71¢ by year’s end, before falling below US68¢ by next June.
A stronger US dollar is also being priced in by Nick Chant, a portfolio manager at Sharpbridge Funds Management, who has tilted his fund towards global stocks to benefit from a stronger greenback.
“The Federal Reserve remains much more concerned about upside inflation risks than downside growth risks,” said Chant. “The renewed tensions involving Iran have clearly increased the risk of higher energy prices feeding back into headline inflation.”
“If elevated oil prices prove sustained rather than temporary, that becomes a genuine macro issue because it limits central banks’ flexibility and could delay the easing cycle.”
The risk of another sustained rise in oil prices firmed this week with Brent Crude futures surging nearly 10 per cent on news of the blockade, which was the biggest jump since the pandemic in 2020. It traded just below $US85 a barrel on Tuesday afternoon.
Westpac’s Franulovich said he had initially though the flare up in the Middle East was a “measured escalation” before news of the blockade and strikes fired into Saudi Arabia by the Yemen-based Houthi rebels.
It “reintroduced the idea that this is a pretty serious risk [for the market],” he said. “This is not contained … but open-ended warfare is not tenable and sustainable for either side.”
Source: https://www.afr.com/markets/currencies/aussie-dollar-under-threat-as-trump-s-blockade-trigger-us-rate-fears-20260714-p60f2r