Market Briefing: Central banks in focus this week
The December edition of our Event Radar & Views In A Nutshell pack is here.
Mixed messages. Softer tone in equities. Bond yields continue to push higher. USD treads water, with a firmer EUR offset by a weaker JPY.
AUD & NZD. NZD tracking around levels last traded in late-2022. AUD near 2024 lows. Will this run continue or will the USD pause for breath?
Event radar. The China data batch, global PMIs, and US Fed/Bank of Japan meetings are the key events to watch this week.
The divergent market trends continued into the end of last week. Equities had another soft session with a large drop in China (CSI300 -2.4%) leading the way after policymakers again pledged to boost consumption but failed to provide specific fiscal stimulus details. Initial gains in the US faded with the S&P500 closing the day flat and recording its first weekly fall (-0.6%) in a month. By contrast, the sell-off in bond yields continued ahead of this week’s central bank meetings. The benchmark US 10yr yield rose ~6bps to ~4.40%, with the sharp ~25bp jump over the past week pushing long end rates back to levels traded in the wake of the November US election. In FX, the USD index tread water, however this masked crosscurrents below the surface. The interest rate sensitive USD/JPY tracked the move up in yields to be at a multi-week high (now ~153.66), and while GBP weakened (now ~$1.2616) after UK GDP data showed the economy contracted for the second straight month, the EUR ticked up a little after its weak run (now ~$1.0496). Elsewhere, the NZD (now ~$0.5764) and AUD (now ~$0.6365) consolidated with the former tracking at levels last traded in late-2022.
Globally it is a fairly busy week in terms of scheduled economic events. Today, the November activity data from China is due (1pm AEDT), and the forward looking global business PMIs are released (Japan 11:30am AEDT, Eurozone 8pm AEDT, UK 8:30pm AEDT, and US 1:45am AEDT). Later this week focus will switch to monetary policy with the US Fed (Thurs morning AEDT), Bank of Japan (Thurs AEDT), and Bank of England (Thurs night AEDT) all meeting.
In our view, there could be some push-pull forces at work when it comes to the USD and broader risk sentiment over the next week days. We think signs the various stimulus measures injected into China's economy (with more to come) are starting to boost activity, coupled with some potential softening in the US PMIs might drag on the lofty USD near-term. This could receive a bit of a kick along later this week if the US Fed delivers another rate cut (which is ~93% factored in) but isn’t as ‘hawkish’ as what markets currently predict. As our chart shows, the assumed path forward for US interest rates is already well above where the Fed’s ‘dot plot’ is sitting. Markets are driven by outcomes relative to expectations. If upgrades by the US Fed to its 2025/26 interest rate projections aren’t as aggressive as what is baked in we believe the USD may give back some ground. This could be compounded if the Bank of Japan delivers another surprise rate hike, which in our judgement is a matter of when, not if.
Global event radar: China Data (Today), FOMC Meeting (Thurs morning AEDT), BoJ Meeting (Thurs), BoE Meeting (Thurs), US PCE Deflator (Fri night AEDT)
AUD Corner
The AUD held its ground, albeit at low levels, on Friday as various push-pull factors flowed through markets. At ~$0.6365 the AUD is hovering around the bottom end of its 2024 range. That said, there were some more positive signs on the AUD crosses. While AUD/EUR consolidated (now ~0.6066), the AUD strengthened against the JPY (now ~97.82) and GBP (now ~0.5044), and it also ticked up a bit versus the NZD (now ~1.1042), CAD (now ~0.9059), and CNH (now ~4.6354).
This week the local economic calendar is limited with consumer confidence (Tuesday) the only release of note. Hence, global macro trends will be in the AUD drivers’ seat with the China data batch (1pm AEDT), global business PMIs, and central bank meetings including the US Fed (Thursday morning AEDT) and Bank of Japan (Thursday AEDT) the key events on the radar. On balance, as discussed above, we think that the risks are tilted to the USD slipping back due to signs momentum in China is improving, the growth differential between the US and the rest of the world (as measured by the PMIs) narrowing slightly, and with the US Fed potentially not exceeding already ‘hawkish’ expectations. We, and the broader consensus, are looking for the US Fed to cut interest rates by another 25bps, however, while we think it may signal less policy easing next year, it might not shift its views as much as the market is now assuming. If realised, we think this could see the elevated USD lose a bit of ground in the short-term, which in turn would give the beleaguered AUD a little boost.
That said, we don’t expect any USD weakness (AUD strength) to last that long or extend too far. As discussed before, the enacting of the Trump policy agenda should be USD supportive over coming months and this should keep the AUD in oscillating around ~$0.64 over Q1, in our view (see Market Musings: Trump 2.0 & the AUD). While a firmer USD will act as an AUD ceiling, we don’t foresee if falling further, on a sustained basis, from already low levels. A fair amount of ‘bad news’ looks factored in with the AUD trading at a ~4 cent 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-$0.64 3% of the time since 2015) because of Australia’s elevated terms of trade and structural changes in its capital flow trends. And relative outperformance on the cross-rates should also be helpful. Diverging monetary policy trends between the measured RBA and other more aggressive central banks should see the AUD strengthen against the EUR, CAD, CNH, and NZD over the medium-term.
AUD event radar: China Data (Today), FOMC Meeting (Thurs morning AEDT), BoJ Meeting (Thurs), BoE Meeting (Thurs), US PCE Deflator (Fri night AEDT)
AUD levels to watch (support / resistance): 0.6300, 0.6340 / 0.6430, 0.6480
SGD Corner
The upswing in US bond yields and softer JPY and EUR has seen the USD strengthen over the past week (see above). This has guided USD/SGD higher (now ~1.3490, the upper end of its multi-month range). The weaker EUR undercurrents have also seen EUR/SGD (now 1.4150) remain trapped near multi-quarter lows, while SGD/JPY has edged back up towards its 200-day moving average (~113.9640).
This week, as flagged above, the global focus should be on the China data, the global PMIs, and meetings by the US Fed and Bank of Japan. In our judgement, a pick up in momentum in China, combined with softer US PMIs, and/or the US Fed not upgrading its interest rate outlook enough to exceed already elevated market pricing could see the USD (and USD/SGD) come under a little downward pressure.
SGD event radar: China Data (Today), FOMC Meeting (Thurs morning AEDT), BoJ Meeting (Thurs), US PCE Deflator (Fri night AEDT) SGD levels to watch (support / resistance): 1.3390, 1.3420 / 1.3530, 1.3590
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (16th December)
JPY PMIs (Dec P) (11:30am)
CNY Retail Sales (Nov) (1pm)
CNY Industrial Production (Nov) (1pm)
CNY Fixed Asset Investment (Nov) (1pm)
EUR France PMIs (Dec P) (7:15pm)
EUR Germany PMIs (Dec P) (7:30pm)
EUR ECB Pres. Lagarde Speaks (7:30pm)
EUR ECB’s Guindos Speaks (7:45pm)
EUR PMIs (Dec P) (8pm)
GBP PMIs (Dec P) (8:30pm)
EUR ECB’s Wunsch Speaks (11pm)
TUESDAY (17th December)
USD PMIs (Dec P) (1:45am)
EUR ECB’s Schnabel Speaks (3:30am)
CAD BoC Governor Macklem Speaks (7:20am)
AUD Consumer Confidence (Dec) (10:30am)
NZD Half-Year Fiscal Update (11am)
GBP Labour Market Data (Oct/Nov) (6pm)
EUR Germany IFO (Dec) (8pm)
EUR ECB’s Kazimir & Rehn Speak (8pm)
EUR Germany ZEW Survey (Dec) (9pm)
WEDNESDAY (18th December)
USD Retail Sales (Nov) (12:30am)
CAD CPI Inflation (Nov) (12:30am)
USD Industrial Production (Nov) (1:15am)
USD NAHB Housing Index (Dec) (2am)
NZD Current Account Balance (Q3) (8:45am)
JPY Trade Balance (Nov) (10:50am)
GBP CPI Inflation (Nov) (6pm)
EUR ECB’s Muller Speaks (6:35pm)
EUR ECB’s Lane Speaks (8pm)
EUR ECB’s Nagel Speaks (8:30pm)
THURSDAY (19th December)
USD Housing Starts/Building Permits (Nov) (12:30am)
USD FOMC Decision (6am)
USD Fed Chair Powell Speaks (6:30am)
JPY BoJ Decision (no set time)
NZD GDP (Q3) (8:45am)
NZD Business Confidence (Dec) (11am)
GBP BoE Decision (9pm)
FRIDAY (20th December)
USD Philly Fed Survey (Dec) (12:30am)
USD Initial Jobless Claims (12:30am)
USD Leading Index (Nov) (2am)
NZD Trade Balance (Nov) (8:45am)
JPY CPI Inflation (Nov) (10:30am)
CNY Loan Prime Rate (1yr/5yr) (12pm)
GBP Retail Sales (Nov) (6pm)
USD Fed's Daly Speaks (11:30pm)
SATURDAY (21st December)
USD PCE Deflator (Nov) (12:30am)
CAD Retail Sales (Oct) (12:30am)
*Note, all times/dates provided are AEDT
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