Market Briefing: Geopolitical jitters
Market jitters. Geopolitics & 'hawkish' macro signals dampened sentiment & supported the USD overnight. AUD unwound yesterday's uptick.
USD trends. The pricing in & enacting of the Trump policy agenda, coupled with geopolitical uncertainty, is a recipe for lingering USD strength.
Central banks. Odds of another near-term rate cut by the BoE & US Fed were pared back. Markets only fully discounting a RBA move by July.
A few market jitters returned overnight with the rebound in risk sentiment late in the previous days trade fading. Concerns about an escalation in the Russia/Ukraine conflict is a factor keeping traders on their toes. A day after Ukraine fired US-made long-range missiles into Russia there were reports this was followed up with a round of British-made missiles. At the same time, several nations, including the US, are said to have temporarily closed their embassies in Ukraine due to fears a sizeable air attack is brewing. On top of the geopolitical issues, the economic news and central bank rhetoric leant a bit more ‘hawkish’. Following on from the upside surprise in Canadian inflation earlier in the week, UK core CPI re-accelerated (now 3.3%pa) while the Eurozone’s wage growth indicator jumped up in Q3. In the US, Fed member also expressed a cautious tone with Governor Cook noting that slowing inflation progress and a solid labour market might see policymakers ‘pause’ their cutting cycle.
On balance these dynamics saw markets trim their Bank of England, ECB, and US Fed rate cut bets. Odds of another cut by the BoE in December have fallen to ~10% while a move by the US Fed is now viewed as a 50/50 proposition. Long end bond yields ticked up with the benchmark US 10yr rate drifting slightly higher (+2bps to 4.41%). The backdrop also exerted a modest amount of downward pressure on equities with the major European stockmarkets ~0.2-0.4% lower and the US S&P500 consolidating after a late-session lift. In FX, the USD edged up with EUR slipping by 0.5% (now ~$1.0537) and USD/JPY rising by a similar amount (now ~155.42). GBP held its ground a little better thanks to the repricing in BoE expectations (now ~$1.2645). Shaky risk appetite has seen the NZD (now ~$0.5872) and AUD (now ~$0.6498) lose some ground, though both are back where they were tracking a few days ago.
There is limited top tier global economic data released over the next 24hrs, although several speakers from the ECB and US Fed are due to hit the wires. On net, we remain of the opinion that the combination of geopolitical unease in Russia/Ukraine and factoring in of the Trump policy agenda (which is focused on protectionist trade tariffs, greater fiscal spending, and steps to curb US immigration) should keep the USD firm. As discussed previously we believe this policy mix may create an unwanted inflation impulse, which in turn keeps US interest rates higher than would have otherwise been the case (see Market Musings: Trump 2.0 & the AUD).
Global event radar: Japan CPI (Fri), Global PMIs (Fri/Sat), RBNZ Meeting (27th Nov), US PCE Deflator (28th Nov), EZ CPI (29th Nov), China PMIs (30th Nov), US Jobs (7th Dec)
AUD corner
The renewed intra-day gyrations in risk assets on the back of ongoing Russia/Ukraine geopolitical worries and ‘hawkish’ macro signals exerted some downward pressure on the AUD overnight (see above). The firmer USD has seen the AUD drop back down towards ~$0.65 (~1% from its post-US election low) with yesterday’s burst of optimism unwinding. That said, in a reflection of the USD impacts the AUD has generally consolidated against the other major currencies. AUD/EUR (now ~0.6167) and AUD/JPY (now ~101) are little changed, and while the AUD eased by ~0.2-0.3% against GBP, CAD, and CNH, AUD/NZD (now ~1.1067) has nudged up a touch.
There has been little new domestic economic news over the past 24hrs. RBA Governor Bullock speaks tonight (7pm AEDT) to a payments conference. While the speech may not contain information about the monetary policy outlook the Q&A might. All up, our long-standing RBA views remain unchanged. We continue to believe that the resilient Australian labour market, sticky core inflation, still elevated level of activity across the economy, and fiscal/income support running through the system, combined with the RBA’s lower starting point are likely to see it lag its global peers in terms of when it starts and how far it goes during the easing cycle. We think the start of a gradual/limited RBA rate cutting phase is a story for late-H1 2025.
As outlined previously, in our judgement the diverging policy trends between the RBA and other central banks should help the AUD outperform EUR, CAD, NZD, CNH, and to a lesser extent GBP over the medium-term. This can help counteract the drag created by a further modest USD appreciation which we are projecting over coming months as the Trump policies are enacted and priced into markets. In our view, this looks set to cap the AUD’s upside (i.e. we now see the AUD trading in the mid-$0.60s over the next year) (see Market Musings: Trump 2.0 & the AUD). However, in addition to relative outperformance on the crosses we also see other factors that work against being overly ‘bearish’ the AUD at already low levels. A decent amount of negativity looks discounted given the AUD is trading ~4 cents below our ‘fair value’ estimate. Statistically, as we have often highlighted, over the past decade the AUD has not sustainably traded much below where it is (it has only been sub-$0.65 6% of the time since 2015) because of Australia’s higher terms of trade and improvement in its trade/current account position.
AUD event radar: RBA Gov. Bullock Speaks (Tonight, 28th Nov), Japan CPI (Fri), Global PMIs (Fri/Sat), AU CPI (27th Nov), RBNZ Meeting (27th Nov), US PCE Deflator (28th Nov), EZ CPI (29th Nov), China PMIs (30th Nov), AU GDP (4th Dec), US Jobs (7th Dec)
AUD levels to watch (support / resistance): 0.6400, 0.6470 / 0.6570, 0.6620
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (21st November)
EUR ECB’s Villeroy Speaks (4:25pm)
EUR ECB’s Knot Speaks (7pm)
AUD RBA Gov. Bullock Speaks (7pm)
EUR ECB’s Holzmann Speaks (7:30pm)
FRIDAY (22nd November)
USD Philly Fed Survey (Nov) (12:30am)
USD Initial Jobless Claims (12:30am)
USD Fed’s Hammack Speaks (12:45am)
GBP BoE’s Mann Speaks (1am)
USD Leading Index (Oct) (2am)
EUR ECB’s Lane Speaks (2:30am)
USD Fed’s Goolsbee Speaks (4:25am)
USD Fed’s Hammack Speaks (4:30am)
USD Fed's Barr Speaks (8:40am)
AUD PMIs (Nov P) (9am)
JPY CPI Inflation (Oct) (10:30am)
JPY PMIs (Nov P) (11:30am)
GBP Retail Sales (Oct) (6pm)
EUR France PMIs (Nov P) (7:15pm)
EUR Germany PMIs (Nov P) (7:30pm)
EUR ECB President Lagarde Speaks (7:30pm)
EUR ECB’s Guindos Speaks (7:40pm)
EUR PMIs (Nov P) (8pm)
GBP PMIs (Nov P) (8:30pm)
SATURDAY (23rd November)
EUR ECB’s Nagel & Villeroy Speak (12am)
CAD Retail Sales (Sep) (12:30am)
USD PMIs (Nov P) (1:45am)
EUR ECB's Schnabel Speaks (2:45am)
*Note, all times/dates provided are AEDT
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