Market Briefing: Fundamentals vs flows
Softer USD. A firmer EUR, stronger JPY, & month-end portfolio rebalancing flows exerted a bit of downward pressure on the USD.
AUD & NZD. AUD ticked up & NZD rose despite RBNZ delivering a 50bp cut & indicating more to come. AUD/NZD below model estimates.
Holiday markets. US markets closed for Thanksgiving tonight & only open for a few hours on Friday. Thinner liquidity may generate bursts of intra-day vol.
Mixed fortunes across markets over the past 24hrs with the economic data and central bank comments butting up against month-end portfolio rebalancing ahead of the US Thanksgiving holidays. US markets are closed tonight and only open for a few hours on Friday night. Numbers wise, in contrast to the jump up in China’s stockmarket yesterday (CSI300 +1.8%) the major Eurozone and US indices lost a bit of ground (S&P500 -0.4%). That said, the S&P500 remains just shy of record highs. Long end bond yields declined with the benchmark US 10yr rate shedding ~5bps (now ~4.25%). While this puts the US 10yr near its November lows some perspective is needed with the US 10yr still hovering towards the upper end of its ~6-month range. European bond yields held up better with the German 2yr ticking up slightly (+2bps to 2.02%). Comments from the normally ‘hawkish’ ECB member Schnabel that policymakers should move ‘gradually’ towards ‘neutral’ saw markets modestly pare back December rate cut bets. The odds of the ECB delivering an outsized 50bp cut in December have been whittled back recently with only ~29bps of easing now discounted.
The tweaks helped the beleaguered EUR edge higher, although at ~$1.0565 it is only back where it was trading a week ago. The interest rate sensitive USD/JPY also extended its pullback with the narrowing in yield differentials guiding it down to ~151.15 (a ~1-month low). The combination of a firmer EUR and stronger JPY exerted downward pressure on the USD (recall EUR and JPY equate to ~71% of the USD index). The softer USD helped other currencies bounce back. GBP (now ~$1.2675) is at a 1-week high, as is the NZD (now ~$0.5895) with the RBNZ’s latest 50bp rate cut and projections showing more to come also seemingly not enough to exceed the ‘dovish’ assumptions that had been built up. AUD (now ~$0.6495) has nudged up to its ~2-week average.
The overnight moves in the USD came about despite the US data reinforcing views that the US Fed should proceed cautiously when it comes to future rate cuts. The second estimate of Q3 US GDP confirmed the economy expanded at a solid clip (2.8%saar), durable goods orders (a proxy for business investment) rebounded in October, initial jobless claims remain at low levels (a sign labour market conditions remain positive), and the core PCE deflator (the Fed’s preferred inflation gauge) accelerated to a 6-month high (now 2.8%pa). As our chart shows, traders are now assuming a gradual and limited glide path lower for the US Fed with only 3 more rate cuts factored in by the end of 2025. From our perspective this suggests that as portfolio rebalancing impacts fade the USD could recover. We believe the combination of ongoing US outperformance and the Trump policy agenda will be USD supportive over the period ahead (see Market Musings: Trump 2.0 & the AUD).
Global event radar: EZ CPI (Fri), China PMIs (Sat), US Jobs (7th Dec), RBA Meeting (10th Dec), US CPI (12th Dec), BoC Meeting (12th Dec), ECB Meeting (13th Dec), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD corner
The softer USD stemming from a modest uptick in the EUR, firmer JPY, and month-end portfolio rebalancing flows ahead of the US Thanksgiving break have helped the AUD grind higher. At ~$0.6495 the AUD has inched its way to its ~2-week average. By contrast, it has been a mixed picture for the AUD on the crosses. The AUD has recorded gains of 0.3-0.4% versus CAD and CNH over the past 24hrs, while it slipped back against EUR (now ~0.6150) and GBP (now ~0.5126). AUD/JPY (now ~98.20) has extended its pullback to be around ~2-month lows, while AUD/NZD (now ~1.1020) lost some ground following yesterday’s RBNZ meeting.
Locally, the monthly CPI indicator for October was released yesterday. Headline inflation held steady at 2.1%pa, though we expect the RBA to look through that given government policy induced falls in electricity prices were a key factor. Core inflation (i.e. the trimmed mean) re-accelerated (now 3.5%pa) to be running broadly inline with the RBA projections with sticky services prices (the area policymakers have been lasering in on) firm due to the ongoing resilience in the labour market and still high level of activity across several sectors. The underlying inflation pulse supports our thinking that the RBA will lag its peers with the start of a modest and gradual rate cutting cycle a story for late-H1 2025. RBA Governor Bullock speaks tonight (7:55pm AEDT). We think that if policy is discussed a similar ‘cautious’ message is likely to be repeated with the RBA on a different path to many of its counterparts.
As discussed before, we expect the pricing in and enacting of the Trump policy agenda of trade tariffs, greater fiscal spending, and steps to curb US immigration to be USD supportive. This in turn looks set to keep the AUD in the mid-$0.60s over the next few quarters (see Market Musings: Trump 2.0 & the AUD). A part of our thesis behind why we see the AUD holding up against the USD is our assessment that diverging fundamentals between Australia and other nations should be AUD supportive against currencies like the EUR, NZD, CAD, GBP, and CNH. Indeed, we believe recent moves on several AUD crosses appear overdone.
A case in point is AUD/NZD. At yesterday’s meeting the RBNZ delivered another 50bp rate cut which lowered the OCR to 4.25%. This moved the OCR below the RBA equivalent for the first time since mid-2013. Notably, the RBNZ flagged more rate cuts are in the pipeline in its updated guidance. In our view, the burst of NZD strength (dip in AUD/NZD) looks to be a short-term positioning adjustment as the RBNZ failed to exceed very dovish expectations. Medium-term NZD headwinds remain in place with NZ’s weak economic backdrop compounded by the reduction in NZ’s interest rate advantage and vulnerabilities associated with funding NZ’s lofty current account deficit (~7% of GDP) during bouts of market turbulence. We are projecting AUD/NZD to rise to ~1.13 by mid-2025 (see Market Musings: AUD/NZD: RBNZ stuck in reverse).
AUD event radar: RBA Gov. Bullock Speaks (Tonight), EZ CPI (Fri), China PMIs (Sat), AU GDP (4th Dec), US Jobs (7th Dec), RBA Meeting (10th Dec), US CPI (12th Dec), BoC Meeting (12th Dec), AU Jobs (12th Dec), ECB Meeting (13th Dec), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD levels to watch (support / resistance): 0.6400, 0.6430 / 0.6520, 0.6560
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (28th November)
NZD Business Confidence (Nov) (11am)
AUD CAPEX (Q3) (11:30am)
EUR Spain CPI Inflation (Nov P) (7pm)
AUD RBA Governor Bullock Speaks (7:55pm)
EUR Confidence Gauges (Nov) (9pm)
USD Thanksgiving Day Holiday
FRIDAY (29th November)
EUR Germany CPI Inflation (Nov P) (12am)
EUR ECB’s Lane Speaks (4am)
NZD Consumer Confidence (Nov) (8am)
JPY Tokyo CPI Inflation (Nov) (10:30am)
JPY Industrial Production (Oct P) (10:50am)
AUD Private Sector Credit (Oct) (11:30am)
EUR France CPI Inflation (Nov P) (6:45pm)
EUR CPI Inflation (Nov P) (9pm)
GBP BoE Financial Stability Review (9:30pm)
EUR ECB’s Guindos Speaks (10:30pm)
SATURDAY (30th November)
EUR ECB’s Nagel Speaks (12am)
CAD GDP (Q3) (12:30am)
USD Chicago PMI (Nov) (1:45am)
CNY PMIs (Nov) (12:30pm)
*Note, all times/dates provided are AEDT
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