Australian Dollar: Fresh Highs Meet a Hawkish Warsh

It was a “good week” for the Australian dollar, the currency climbing to fresh leg highs of 0.7208 against the US dollar Friday night and reaching multi-year highs against several major currencies. However, the move came unstuck later Friday after Fed Chair Kevin Warsh delivered a hawkish speech at the Jackson Hole symposium, reinforcing the Federal Reserve’s commitment to returning inflation to target. Looking ahead, markets face a busy week, including Australia Q2 GDP and the RBNZ meeting (Wed), speeches from RBA Assistant Governor Brad Jones and Fed Governor Christopher Waller (Thur), and US non-farm payrolls (Fri).

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1 Australian Dollar: Fresh Highs Meet a Hawkish Warsh

Australian Dollar: Fresh Highs Meet a Hawkish Warsh

It was a “good week” for the Australian dollar, the currency climbing to fresh leg highs of 0.7208 against the US dollar Friday night and reaching multi-year highs against several major currencies. Stronger-than-expected July inflation data triggered a hawkish repricing of RBA expectations, helping drive the Australian dollar higher.

However, the move came unstuck later Friday after Fed Chair Kevin Warsh delivered a hawkish speech at the Jackson Hole symposium, reinforcing the Federal Reserve’s commitment to returning inflation to target. The resulting rebound in the US dollar saw AUD/USD fall back to 0.7156, unwinding the week’s CPI-driven gains. Still, for the week, the Australian dollar was the only G10 currency to clock a gain against the US dollar.

While the Australian dollar’s broader eight-week uptrend remains intact, the next phase may rely more heavily on domestic interest rate expectations and strength against other currencies, rather than broad-based US dollar weakness.

Looking ahead, markets face a busy week, including Australia Q2 GDP and the RBNZ meeting (Wed), speeches from RBA Assistant Governor Brad Jones and Fed Governor Christopher Waller (Thur), and US non-farm payrolls (Fri).

Stronger inflation boosts RBA rate expectations

July inflation surprised on the upside, with headline CPI rising 1.0% over the month and trimmed mean inflation increasing 0.5%, both above market expectations. The strength was concentrated in services and durable goods, suggesting domestic inflation pressures remain more persistent than hoped. While some of the increase may reflect post-financial-year price resets and stronger wage outcomes, inflation pressures also broadened across the economy.

Combined with last week’s hawkish RBA meeting minutes, the result prompted markets to increase expectations of another rate hike. Investors are now pricing around a 50% chance of a hike in September and a full hike by November.

While Westpac’s Economics team continues to view a November hike as a risk rather than its base case, softer labour market and wage growth outcomes are unlikely to prevent the RBA maintaining a hawkish tone in the near term.

Last week’s investment indicators provided a mixed lead-in to this week’s GDP release. Construction activity and business investment both softened, driven largely by weaker mining activity and a pullback in machinery and equipment spending. However, much of the weakness reflected project-specific factors, including softer data centre investment. Underlying investment remains resilient and forward spending plans continue to point to solid growth.

Jackson Hole revives US rate hike expectations

The annual benchmark revision to US employment data painted a slightly weaker picture of the labour market than previously reported. Using a broader survey that captures almost all US employment, the BLS revised payroll growth lower by 79k jobs in the year to March 2026, compared with expectations for an increase of 183k. Private sector payrolls accounted for most of the downgrade, falling by 178k jobs.

That softer labour market signal was quickly overshadowed by Fed Chair Warsh’s Jackson Hole speech. Warsh struck a distinctly hawkish tone, emphasising the Fed’s commitment to its 2% inflation target and signalling policymakers remain prepared to act if inflation fails to slow sufficiently.

Markets responded by increasing the probability of a September Fed rate hike to around 60%. Meanwhile, July core PCE inflation rose 0.2% over the month, matching expectations and helping keep another hike firmly on the table.

The US dollar rallied, gold prices fell nearly 3%, and the broad US dollar weakness that had supported the Australian dollar and other risk assets in recent months came to an abrupt halt.

US-Canada trade tensions lift AUD/CAD

US-Canada trade tensions escalated last week. After negotiations broke down on 22 August, President Trump announced a new 50% tariff on Canadian vehicles, auto parts and steel from next year. Canada quickly retaliated, with PM Mark Carney unveiling up to 50% tariffs on C$27.6 billion (US$19.9 billion) of US goods, describing the measures as a “dollar-for-dollar” response to the US action.

AUD/CAD rallied to 0.9981, its highest level since February 2021 and within touching distance of parity. However, renewed tensions in the Middle East and the stronger US dollar following Jackson Hole have since trimmed some of those gains, with the cross beginning the week around 0.9950.

Elsewhere, AUD/JPY rose to a new multi-decade high of 114.96 before easing back towards 114.50. AUD/EUR also gained ground, rising around 0.85% to trade near 0.6182.

A key week for growth and jobs

Attention now turns to Australian Q2 GDP data on Wednesday. Markets expect growth of 0.3% q/q and 1.9% y/y, while Westpac forecasts a slightly softer 0.2% quarterly increase. Although economic growth remains subdued, investment spending continues to provide support and points to a gradual improvement in activity.

In the US, Friday’s non-farm payrolls report will be closely watched. While Warsh’s comments strengthened the Fed’s inflation-fighting credentials, signs of a cooling labour market mean a weak payrolls result could challenge expectations for further rate hikes. A reasonably strong sequence of payrolls prints at the start of the year gave way to a stalling picture by mid-year. As of July, the three month average pace had slowed to 20k. A print on the weaker side of this trend can undercut Fed pricing, but against that, supply constraints around low immigration mean the labour market is not actually loosening much. Consensus in the range is 55k

The Reserve Bank of New Zealand is widely expected to raise rates by 25bp this week. According to Westpac’s NZ economists, while economic recovery remains fragile and significant risks abound on further hikes, core inflation remains too high. It’s unclear whether supply shocks will dissipate either quickly or sustainably. Hence, it’s likely that higher interest rates will be required through 2027.

RBA Assistant Governors Brad Jones, and Sarah Hunter are both set to speak this week, though neither topics are conducive to comments around the policy rate – we’ll see.

Fed Governor Christopher Waller is the pick of a busy Fed speaking roster, being a centrist and influential member of the Board of Governors. If he strikes a similarly hawkish tone to Warsh, the US dollar could see another round of buying.