Market Briefing: Central bank divergence
Read the 2025 Currency Outlook from Corpay Currency Research
Calm down. A sense of calm returned overnight. US equities consolidated & the US yield curve steepened. USD held its ground. AUD ticked up a little.
Central banks. BoE kept rates steady but kept door open to more easing. BoJ more 'dovish' than expected. GBP & especially JPY underperformed.
Event radar. Japan CPI, US PCE deflator, & appearances by Fed members in focus today. Is too much 'good news' priced in the USD?
This will be our final Market Briefing for 2024. Regular publication will resume in mid-January. We hope everyone has a safe and enjoyable festive season. We wish you the best of luck in 2025.
A sense of calm has returned to markets following yesterday’s ‘hawkish’ US Fed induced volatility. US equities consolidated. Though given the size of yesterday’s falls (the NASDAQ tumbled 3.6%, its biggest 1-day decline since October 2022) this is somewhat underwhelming. Elsewhere, the US yield curve steepened with the upswing in long-end rates continuing (US 10yr +5bps to 4.57%, a high since June) and short-end rates partially reversing course (US 2yr -4bps). Base metal and energy prices remained under pressure with copper (-0.3%) and WTI crude (-0.5%) lower again.
In FX, the USD index held its ground, but this masked diverging movements below the surface. EUR nudged up after tumbling in the wake of the US Fed decision (now ~$1.0367), and the CAD appreciated a touch (USD/CAD dipped to ~1.4383). By contrast, GBP extended its pullback and is hovering near a ~7-month low (now ~$1.2506). As expected, the Bank of England kept interest rates steady at 4.75%, but in a turn from the recent trend policymakers pushed back against the markets ‘hawkish’ assumptions. 3 members of the BoE’s 9 person committee voted for a rate cut and the accompanying commentary also talked down the inflation risks stemming from strength in volatile wages measures. There was also a sizeable move in USD/JPY due to JPY weakness. At ~157.40 USD/JPY is up around levels last traded in late-July. The Bank of Japan also kept interest rates unchanged yesterday, with markets surprised by the ‘dovish’ tone from Governor Ueda who noted that “it will take a long time before the full picture is clear for both the spring wage negotiations and the Trump administration’s policies”. Odds of another near-term BoJ rate hike were pared back. And while the NZD (now ~$0.5636) remains trapped at multi-year lows after the confirmation NZ was in recession bolstered bets the RBNZ may deliver another 50bp rate cut in February, the AUD edged up a fraction (now ~$0.6244).
Japan CPI inflation (10:30am AEDT), the US PCE deflator (the Fed’s preferred inflation gauge) (12:30am AEDT), and appearances by the US Fed’s Daly (11:30pm AEDT) and Williams (12:30am AEDT) are on the radar. In our view, signs US price pressures are lingering and a ‘cautious’ message from Fed members can keep the USD supported. But further large gains may be hard to come by given forward looking markets appear to have baked in a lot of ‘good news’ and with the USD index hitting ‘overbought’ levels on technical momentum indicators such as relative strength indices.
Global event radar: US PCE Deflator (Tonight)
AUD Corner
The battered and bruised AUD has picked itself up off the canvas over the past 24hrs. After falling sharply in the wake of the US Fed meeting, and touching levels last traded in October 2022, AUD/USD nudged up slightly (now ~$0.6244). Relative strength on the crosses is a factor. While AUD/EUR and AUD/CNH edged up a modest ~0.1-0.2%, gains of ~0.7-0.8% were recorded against GBP and NZD after the BoE kept the door open to further policy easing and the weak NZ GDP bolstered expectations for another outsized RBNZ rate reduction in Q1 (see above). AUD/JPY also spiked by ~2% to be north of ~98 with the JPY weighed down by BoJ Governor Ueda’s ‘dovish’ tone about the prospect of another near-term rate hike at yesterday’s meeting.
As our charts show the AUD has been following a similar path since the November US election to what occurred in late-2016. Recall, back then the US Fed also delivered its first rate hike of that cycle in mid-December 2016 which compounded the USD positive trends generated by the factoring in of the Trump agenda. Notably, the drag on the AUD didn’t last even with the US Fed delivering a stream of interest rate hikes in 2017. As discussed in our 2025 outlook we think a similar pattern could unfold next year.
While we don’t expect the AUD to snap back aggressively near-term (we are forecasting it to oscillate around ~$0.64-0.65 in Q1), we do feel there are asymmetric medium-term risks brewing given the low levels it is tracking at (i.e. we see more chance of the AUD rising than falling further on a sustained basis). This is because: (a) the sharp drop in AUD/USD has seen it hit ‘oversold’ levels on technical momentum indicators; (b) a decent amount of ‘negativity’ is priced in with the AUD trading at a ~2-3 cent discount to our ‘fair value’ models; (c) the AUD has overshot and diverged from various drivers such as bond yield spreads, and several factors appear in better shape than when the AUD was last this low; (d) statistically, the AUD is in 'rarefied air'. Since 2015 the AUD has only been below where it is sitting less than 1% of the time, and the bulk of this small pool of instances was during bouts of acute market stress such as the start of COVID. Australia’s above average terms of trade and change in its capital flow trends, which generated the structural shift in the AUD's distribution, are still in place; and (e) diverging policy trends between the measured RBA and other more aggressive central banks remain. We expect this to be AUD supportive versus EUR, CAD, CNH, and NZD over time.
AUD event radar: US PCE Deflator (Tonight)
AUD levels to watch (support / resistance): 0.6120, 0.6200 / 0.6310, 0.6380
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (20th December)
JPY CPI Inflation (Nov) (10:30am)
CNY Loan Prime Rate (1yr/5yr) (12pm)
GBP Retail Sales (Nov) (6pm)
USD Fed's Daly Speaks (11:30pm)
SATURDAY (21st December)
USD PCE Deflator (Nov) (12:30am)
USD Fed's Williams Speaks (12:30am)
CAD Retail Sales (Oct) (12:30am)
*Note, all times/dates provided are AEDT
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