Market Briefing: US politics still in the driver's seat
US politics. Trump's Treasury Secretary pick supported sentiment. US equities rose while bond yields fell. USD lost a little ground.
AUD dip. AUD bucked the trend to be back near ~$0.65. Underperformance on the crosses was a factor. We don't think this should last.
Data flow. Limited releases today. RBNZ expected to cut rates tomorrow. Australian monthly CPI also due Wednesday. Will it re-accelerate?
The market tone has been a bit more upbeat at the start of the new week. News President-elect Trump has nominated experienced hedge fund manager Scott Bessent for Treasury Secretary, a more orthodox choice than other picks, underpinned sentiment as he is expected to focus on economic and market stability. Based on past interviews Bessent is in favour of more fiscal discipline (he is said to be looking to reduce the US’ budget deficit from ~7% of GDP to ~3% by 2028), increasing the US’ oil production, supporting 3%pa GDP growth, and phasing in trade-tariffs gradually to limit potential shocks. Time will tell whether he will be able to influence President Trump’s decisions. However, the pragmatic nomination has been taken well by markets.
European and US equities enjoyed a slightly positive session with the S&P500 ticking up ~0.2%. Long end bond yields declined with larger moves flowing through in the US. The benchmark US 10yr yield tumbled ~13bps. Although at ~4.27% it remains towards the upper end of its 5-month range. 10yr yields in the UK and Germany were down a more modest 3-4bps. Across commodities, WTI crude oil shed ~3% (now ~US$69/brl) with reports a ceasefire between Israel and Lebanon may be announced soon also helpful in reducing the Middle East risk premium. In FX, after opening lower in yesterday’s Asian trade the USD index’s downshift didn’t extend further. EUR is a little above its recent lows but at ~$1.05 it is still lingering near the bottom of its ~1-year range. GBP is hovering around ~$1.2565, while USD/JPY is at ~154.10 despite the narrowing in US-Japan yield differentials. Ahead of tomorrow’s RBNZ meeting where a 50bp rate cut is widely anticipated the NZD tread water just north of its 2024 lows (now ~$0.5850). And the AUD gave back ground with yesterday morning’s initial uptick unwinding as the day rolled on (now ~$0.6505).
We doubt the news of Bessent’s nomination for Treasury Secretary will be more than a short-term market driver. The fundamentals remain in the USD’s favour. The US economy is outperforming its peers and the US Fed is likely to deliver fewer rate cuts over the next year than many other central banks such as the ECB. Added to that the Trump policy agenda of trade tariffs, tax cuts, and reduced immigration is still in the pipeline and it should generate more inflation (and higher rates) than would otherwise be the case (see Market Musings: Trump 2.0 & the AUD). As our chart shows, the current dip in the USD looks quite like what happened in late-2016, but back then the USD subsequently had another burst of strength in early-2017 as Trump officially took charge. A similar pattern could be on the cards over the period ahead, in our opinion.
Global event radar: RBNZ Meeting (Weds), US PCE Deflator (Thurs), 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 AUD has continued to move against the grain. Although unlike its recent positive performance against a firmer USD it unwound yesterday morning’s burst of strength despite a softer USD (see above). At ~$0.6505 the AUD is back broadly inline with where it closed last week with the AUD backpedaling a little on the crosses over the past 24hrs. The AUD has weakened by ~0.4-0.8% against the other major currencies with AUD/EUR the largest mover. However at ~0.6190 we would note that AUD/EUR remains within striking distance of its 2024 peak.
We don’t believe the swings that have come through in the AUD crosses at the start of the new week are the beginning of a larger trend. Rather, we think they are just the typical day-to-day volatility that occurs in FX markets. Over the medium-term, we feel that the fundamentals should help the AUD outperform on the crosses. While we expect AUD/USD to track in the mid-$0.60s over the next few quarters diverging trends between the RBA and other central banks should help the AUD strengthen against EUR, CAD, NZD, CNH, and GBP (see Market Musings: Trump 2.0 & the AUD). These forces could be on show again over the next few days. Domestically, the monthly CPI indicator for October is released tomorrow, RBA Governor Bullock is speaking on Thursday night, and inputs for Q3 GDP are due. Less favourable base effects as larger price falls from a year ago drop out of calculations suggest headline and core inflation might have mechanically re-accelerated in October (mkt 2.3%pa from 2.1%pa). If true, this, and comments from Governor Bullock that policymakers are still concerned about inflation risks because of the resilience in the labour market and offshore developments would reinforce our long-standing assessment that the RBA will lag its peers in the current easing cycle. We believe the start of a gradual and limited RBA rate cutting cycle is a story for late-H1 2025.
By contrast, other central banks like the ECB, Bank of Canada, and RBNZ look set to deliver more rate cuts over the period ahead due to the step down in inflation, widening cracks in their labour markets, and weak economic activity. Specifically, the RBNZ looks set to lower its cash rate by another 50bps to 4.25% on Wednesday and indicate it has further to go next year. The contrasting economic fortunes of Australia and NZ underpin our forecasts for AUD/NZD to rise towards ~1.13 over coming months. Our fundamental model suggests that risks to this view are tilted to the upside.
AUD event radar: AU CPI (Weds), RBNZ Meeting (Weds), US PCE Deflator (Thurs), RBA Gov. Bullock Speaks (Thurs), 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): 0.6420, 0.6470 / 0.6570, 0.6630
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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