Market Briefing: China changes its policy tune
The December edition of our Event Radar & Views In A Nutshell pack is here.
China bounce. Policymakers in China changed their tone when it comes to policy. Prospect of more stimulus supported assets like the AUD.
RBA focus. No rate change expected from RBA. Will it alter its guidance? A tweak could see the AUD lose some ground.
Event radar. RBA today. Later this week, ECB & BoC meet. US CPI inflation also due, & the China CEWC will be held.
A bit of a reversal of fortunes across markets at the start of the new week with moves that flowed in the wake of Friday nights US jobs data reversing. The catalyst was news out of China where the decision-making Politburo signaled bolder economic support over the next year as they attempt to tackle stuttering momentum, deflation risks, and potential Trump-related trade headwinds. Specifically, policymakers indicated that after 14 years of maintaining “prudent” monetary policy they are shifting to a “moderately loose” stance (something they last had in place in the period around the GFC). Added to that there was a pledge of “more proactive” fiscal policy, steps to “forcefully boost consumption”, and efforts to stabilise the property and stock markets.
The stronger tone comes ahead of China’s annual Central Economic Work Conference which is reportedly set to take place this week. The CEWC is where GDP growth, fiscal deficit, and borrowing targets are determined. A larger projected budget deficit and/or a challenging but achievable growth target could reinforce expectations authorities in China will unveil a range of specific stimulus measures sooner rather than later.
In terms of the numbers, base metal and energy prices strengthened with WTI crude and copper rising ~1.4%. Iron ore rallied (+3.2% to US$106/tn). Bond yields also ticked higher with curves steepening a little. The benchmark US 10yr unwound Friday’s dip (+4bps to ~4.20%). Across equities, there were strong gains in Hong Kong after the China news broke (Hang Seng +2.8%), although the European reaction was more modest (EuroStoxx600 +0.1%). And while Chinese stocks listed in the US had a positive session overnight the overall market softened (S&P500 -0.6%). News China was also opening an anti-trust probe on a 2020 deal by megacap Nvidia and the upcoming US CPI inflation data (released Weds night AEDT) took the heat out of things. In FX, the USD index tread water, however there were push and pull forces at play below the surface. EUR eased (now ~$1.0548), GBP consolidated (now ~$1.2745), and USD/JPY jumped back over ~151 due to the more positive market vibes. USD/CNH lost a little ground (now ~7.2683), and China-linked currencies like the NZD (now ~$0.5863) and AUD (now ~$0.6435) outperformed. Ahead of today’s RBA decision (2:30pm AEDT) the AUD is back where it was tracking late last week.
This week, in addition to the RBA, China CEWC, and US CPI, the Bank of Canada (Weds night AEDT) and ECB (Thurs night AEDT) also meet. Another interest rate cut by the BoC and ECB is expected, with a 50bp move anticipated by the former and a 25bp reduction predicted by the latter. Data wise, indicators are pointing to US core inflation holding up at ~3.3%pa. If realised, and the other central banks maintain a 'dovish' tone to go along with the projected rate cuts, we believe the USD may edge higher as medium-term policy expectations between the US Fed and others widens.
Global event radar: RBA Meeting (Today), US CPI (Weds night), BoC Meeting (Weds night), ECB Meeting (Thurs night), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD Corner
After touching a fresh multi-month low in the wake of Friday night’s US jobs report, the AUD rebounded late-yesterday due to the shift in tone by policymakers in China (see above). The prospect of more growth-supportive measures out of China has given cyclical assets a lift with the AUD back where it was trading late last week (now ~$0.6435). The AUD has also recovered lost ground on the crosses. Gains of ~0.5-0.8% were recorded against the EUR, GBP, CAD, and CNH, while AUD/JPY jumped up (+1.6%) to be north of ~97.30. AUD/NZD also ticked higher, though moves were more constrained (now ~1.0977).
Locally, focus today will be on the RBA (2:30pm AEDT) and Governor Bullock’s press conference (from 3:30pm AEDT). This is the last one of 2024 with the RBA’s next meeting on 18 February. No policy change is anticipated by the RBA today with markets assigning a ~95% chance rates are held steady at 4.35%. Rather, attention will be on the RBA’s guidance. Due in part to the ongoing resilience in the labour market Australian core inflation is still elevated. That said, as shown in the Q3 GDP figures, growth momentum is subpar, particularly across the private sector. Hence, we think there is a chance the RBA alters its language which has been suggesting “the Board is not ruling anything in or out”. In our mind, another rate hike is not really on the table so the RBA shouldn’t continue to flag the risk. An adjustment of this language could see the AUD dip towards recent lows as markets look to more fully factor in the start of a RBA easing cycle.
If the RBA changes its wording that doesn’t mean a rate cut is imminent. The data will drive the RBA’s moves, and it would simply be acknowledging the state of play. Indeed, as our chart shows, markets are already of view the next move is down with ~3 RBA rate cuts discounted by end-2025. Growth has slowed, but with the level of activity still high, the jobs market solid, and fiscal/income support flowing we continue to believe the RBA will lag its peers in terms of how fast it moves. Hence, over the medium-term monetary policy trends should remain in Australia’s favour and this is expected to be AUD supportive against the EUR, CAD, GBP, CNH, and NZD.
As discussed before, the Trump policy agenda should be USD supportive and this may keep the AUD in the mid-$0.60s over H1 2025 (see Market Musings: Trump 2.0 & the AUD). While firmer USD impulses act as an AUD ceiling, we don’t foresee if falling further, on a sustained basis, from already low levels. A decent amount of ‘negativity’ looks priced with the AUD trading at a discount to our ‘fair value’ models. Additionally, over the past decade the AUD has not sustainably traded below where it is (it has only been sub-$0.6450 5% of the time since 2015) because of Australia’s elevated terms of trade and capital flow trends. China stimulus can help keep this in place.
AUD event radar: RBA Meeting (Today), US CPI (Weds night), BoC Meeting (Weds night), AU Jobs (Thurs), ECB Meeting (Thurs night), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD levels to watch (support / resistance): 0.6350, 0.6400 / 0.6490, 0.6530
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
TUESDAY (10th December)
CNY Exports/Imports (Nov) (no set time)
AUD Business Conditions (Nov) (11:30am)
AUD RBA Decision (2:30pm)
AUD RBA Gov. Bullock Speaks (3:30pm)
USD NFIB Small Business Optimism (Nov) (10pm)
WEDNESDAY (11th December)
NZD Manufacturing Activity (Q3) (8:45am)
AUD RBA’s Hauser Speaks (6pm)
THURSDAY (12th December)
USD CPI Inflation (Nov) (12:30am)
CAD BoC Decision (1:45am)
NZD Card Spending (Nov) (8:45am)
AUD RBA’s Jones Speaks (9:15am)
AUD Jobs Report (Nov) (11:30am)
FRIDAY (13th December)
EUR ECB Decision (12:15am)
USD PPI Inflation (Nov) (12:30am)
USD Initial Jobless Claims (12:30am)
EUR ECB President Lagarde Speaks (12:45am)
NZD Net Migration (Oct) (8:45am)
JPY Tankan Survey (Q4) (10:50am)
AUD RBA’s Hunter Speaks (12:30pm)
GBP GDP – Monthly (Oct) (6pm)
EUR ECB’s Holzmann Speaks (8pm)
EUR Industrial Production (Oct) (9pm)
*Note, all times/dates provided are AEDT
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