The Australian dollar is increasingly being treated as the clearest market signal that Australia may be heading into another inflation shock.
This comes after the United States began enforcing a naval blockade on vessels entering and exiting Iranian ports which sent the currency sharply lower at the start of the week.
After rallying on last week’s tentative ceasefire optimism, the Australian dollar opened Monday around 0.6 per cent lower near US70.2 cents, unwinding part of a move that had briefly pushed it to one-month highs around US70.7 cents, with the reversal pointing to a more immediate threat for Australia in the form of higher oil prices, a weaker currency and a sharper imported inflation pulse.
Ebury economist Anthony Malouf said the currency’s rebound had been driven by short-lived optimism around a conditional two-week US-Iran ceasefire.
“AUD finished last week up 2.5 per cent, hitting near one-month highs around 0.707 against USD as risk appetite swung wildly. Markets initially reacted positively to a conditional two-week US-Iran ceasefire, but optimism quickly soured as Iran restricted Strait of Hormuz traffic and enforced illegal tolls.
“Fresh drone strikes on Saudi infrastructure further signalled that energy disruptions are far from over,” Malouf said.
Malouf said the weekend collapse in talks in Islamabad, followed by Trump’s announcement of a full naval blockade of the Strait, had “effectively erased” the truce premium that had briefly lifted the currency, leaving the AUD once again tightly bound to Middle East developments.
“However, AUD opened 0.6 per cent lower this morning [13 April], trading around 0.702 USD, following the collapse of weekend negotiations in Islamabad.
“Talks broke down after Iran refused to abandon its nuclear weapons programme, prompting President Trump to announce a full naval blockade of the Strait of Hormuz.
“Iran has since warned that any approaching military vessels will be treated as a ceasefire violation. This escalation has effectively erased the “truce premium,” with AUD now tightly bound to further Middle Eastern developments,” he said.
Westpac said the Australian dollar had also opened the week with another familiar “Monday gap” lower, falling to around US69.86 cents in early Asia trade before stabilising, after rising from roughly US69 cents at the start of last week to a high of US70.95 cents on Friday.
“The Australian dollar starts the week with yet another round of consequential weekend war-related headlines to contend with. An uneasy two-week US-Iran ceasefire is technically still alive, but it is effectively on life-support,” Westpac said.
Brent crude climbed back above US$100 a barrel after the blockade announcement, while immediate physical crude cargoes for Europe reportedly traded near US$150 a barrel as buyers scrambled for non-Middle Eastern supply, adding to the sense that currency weakness and oil prices are now working in tandem against Australia’s inflation outlook.
Because a lower Australian dollar makes imported fuel and energy more expensive in local terms, the latest move raises the risk that households and businesses will face another round of price pressure just as domestic demand had already started to soften.
AMP chief economist Shane Oliver said the near-term stagflationary hit from the conflict was already “baked in” for Australia, with higher inflation and weaker growth now the most immediate economic consequence of the Hormuz disruption.
He said inflation could peak at around 5 to 5.5 per cent this quarter, while GDP growth could slow to around 1.5 per cent this year, lifting recession risk and making additional RBA rate hikes more likely.
Oliver said the supply squeeze was still building because the last ships that cleared the Strait at the end of February were only now arriving at their destinations, meaning Asian refineries were approaching the point where restricted crude flows would begin to bite more sharply.
After allowing for diversions such as Saudi Arabia’s East-West pipeline, he estimated the disruption still amounted to a 10 to 15 per cent hit to global oil supply, enough to send prices towards US$150 a barrel if demand needed to be rationed.
He also warned that even if tensions eased, it would still take months for Gulf energy extraction, tanker loading, shipping routes and refined fuel deliveries to return to normal, meaning the local inflation hit could persist well beyond any pause in hostilities.
