Market Briefing: RBA rate cuts coming into view
The December edition of our Event Radar & Views In A Nutshell pack is here.
RBA rhetoric. Changes by the RBA to its guidance weighed on AUD. NZD has gone along for the ride. Odds of a February RBA cut have risen.
Data driven. Data will drive the RBA's decision. Jobs report released tomorrow. Quarterly CPI out in late-January.
Global macro. Bank of Canada expected to cut rates again tonight. US CPI also due. Sticky core inflation could give the USD more support.
Offshore market moves were fairly constrained overnight as participants await the latest read on US inflation (due tonight at 12:30am AEDT). European and US equities dipped with the S&P500 (-0.3%) holding up a bit better (EuroStoxx600 -0.5%). Despite the recent soft patch, the US S&P500 remains around ~1% from its record highs and ~26% above where it started the year. Bond yields in the US rose ~2bps with the benchmark 10yr rate nudging up to ~4.22%, just above its ~1-year average. In FX, the USD index is a little firmer with EUR slipping towards ~$1.0530 and the interest rate sensitive USD/JPY edging up to its 200-day moving average (~152). The main market action over the past 24hrs has been in Australian interest rate expectations, the AUD, and the NZD. The ‘dovish’ tilt by the RBA at yesterday’s meeting, which has opened the door to the start of its easing cycle in the new year (see below), weighed on Australian bond yields and overpowered the China stimulus related optimism seen in the AUD the day before. The AUD has tumbled back to its recently touched multi-month lows (now ~$0.6383). The NZD has been dragged down in sympathy with the flightless bird trading at a fresh 2024 low (now ~$0.5802).
In terms of the global data, the US NFIB small business survey was released. Optimism about the outlook surged after the Trump election win given his business-friendly policies of less regulation and tax cuts. The index jumped by a monthly record of 8pts to its highest level since mid-2021 with a higher percentage of firms indicating expectations for a ‘better economy’. Time will tell if the post-election exuberance translates to the real world given the prospect of trade tariffs also coming through. We would note that there was a similar lift in business sentiment following the Trump win in late-2016, yet growth momentum across the US economy slowed in H1 2017.
In addition to the US CPI data (12:30am AEDT) the Bank of Canada also meets tonight (1:45am AEDT). Widening cracks in the Canadian labour market and step down in inflation should see the BoC deliver another outsized 50bp rate cut. If realised this would lower the BoC policy rate to 3.25%. This is down from a peak of 5%, with the BoC having started to reverse course in June. In the US, various indicators are pointing to a stalling in the disinflation trend with core CPI projected to hold steady at 3.3%pa. In our opinion, this type of outcome could see markets pare back their US Fed rate cut bets. Another 25bp rate reduction by the US Fed next week is assigned a ~85% chance, with just over 3 cuts factored in over the next year. An upward adjustment in US interest rates coupled with other central banks like the BoC delivering further easing may give the USD more short-term support.
Global event radar: US CPI (Tonight), BoC Meeting (Tonight), ECB Meeting (Thurs night), China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD Corner
Intra-day gyrations in the AUD have continued with the rebound following the shift in tone by policymakers in China unwinding on the back of the RBA’s change in tone. At ~$0.6383 the AUD is hovering near multi-month lows. The AUD has also come under pressure on most crosses. AUD/EUR (now ~0.6063) is near the bottom of its ~1-month range; AUD/JPY is tracking sub ~97; AUD/GBP (now ~0.4997) is close to cyclical lows; ahead of tonight’s BoC meeting AUD/CAD (now ~0.9043) is around its 1-year average; and AUD/CNH (now ~4.6336) is at levels last traded in August. It hasn’t been all one-way with AUD/NZD bucking the trend (now ~1.10) thanks to NZD underperformance.
In terms of the RBA, in its last meeting of the year interest rates were left at 4.35%. However, as we had flagged in yesterday’s Market Briefing, the RBA adjusted its guidance to reflect the state of play in the economy and the balance of risks regarding inflation. Prior rhetoric that the Board “is not ruling anything in or out” was jettisoned, as was the comment that policy “will need to be sufficiently restrictive” until there is confidence inflation is heading sustainably towards target. Instead, the RBA now notes that the run of recent data mean “the Board is gaining some confidence” price pressures are on the right track and that “some upside” risks “have eased”.
The tweaks in the RBA’s commentary shouldn’t be a surprise as further rate hikes weren't really on the table, despite what was being suggested. That said, it also doesn’t necessarily mean a stream of cuts is imminent. As RBA Governor Bullock outlined the data is in the driver’s seat with quarterly CPI (due late-January), a couple of labour market readings (including one tomorrow), and more information on growth due before the RBA next meets on 18 February 2025. In our judgement, each meeting in H1 2025 should be considered ‘live’ for a change, but as things stand, we continue to believe the RBA’s first step is probably more likely to be taken in May. RBA Deputy Governor Hauser also speaks tonight (6pm AEDT).
A recalibration lower in rates has always been part of our AUD thinking. As inflation slows rates need to be lowered to ensure policy settings don’t mechanically become unduly ‘restrictive’. Odds of a RBA cut in February have risen to ~65%, with 3 moves discounted by September. However, FX is a relative price and a measured RBA easing path remains different from many other central banks. As the dust settles, we expect the AUD to level off and claw back ground against currencies such as the EUR, CAD, CNH, and NZD. Tonight’s US CPI data (12:30am AEDT) poses another short-term downside risk AUD/USD, but we don’t foresee it sustainably falling much more from already low levels given it is trading at a discount to ‘fair value’ and with various underlying supports such as capital flow trends still in place (see Market Musings - RBA: Moving closer to rate cuts).
AUD event radar: US CPI (Tonight), BoC Meeting (Tonight), 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): 0.6300, 0.6350 / 0.6450, 0.6500
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (11th December)
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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