Market Briefing: Commodity currencies under the pump
Read the 2025 Currency Outlook from Corpay Currency Research
Commodity FX. AUD, NZD, & CAD under pressure. AUD around levels last traded in November-2023. NZD touched a fresh ~2-year low.
Central banks. US Fed meets tomorrow, as does BoJ & BoE. Another Fed rate cut expected. Focus will be on its guidance & forecasts.
Already priced? Markets already factoring in fewer Fed rate cuts in 2025. It could be hard for the Fed to be more 'hawkish' than what's priced.
Central bank meetings will be the focus over the next few sessions with the US Fed (Thurs 6am AEDT), Bank of Japan (Thurs, no set time), and Bank of England (Thurs 11pm AEDT) holding court. Overnight, a spate of economic data and other events has washed through markets with positioning adjustments ahead of tomorrow's event risk also generating some movement.
In terms of the specifics, in the UK more signs the labour market is holding up with employment stronger than predicted and wages (an input into services/core inflation) accelerating saw bond yields jump (UK 10yr +8bps) and GBP edge higher (now ~$1.2711) as the prospect of ‘higher for longer’ interest rates was discounted. UK inflation data is released tonight (6pm AEDT) with only ~2 BoE rate cuts currently priced in over the next year. In the US, there were mixed signals. Industrial production unexpectedly declined for a third straight month despite a strike in the aerospace industry that had depressed activity having ended. By contrast, US headline retail sales were better than forecast (+0.7%) with a lift in car purchases and online shopping as ‘Black Friday’ deals kicked off key drivers. But beyond that spending was better classed as being ‘good rather than great’ with core sales more modest (+0.2%).
US bond yields consolidated with the benchmark 10yr rate hovering near ~4.40%, while the equity market unwound yesterday’s uptick (S&P500 -0.6%). Across FX, the USD index tread water with a firmer GBP and stronger JPY on the back of the shaky risk sentiment (USD/JPY dipped to ~153.40) counteracting weakness in the EUR (now ~$1.0489) as the German IFO survey again pointed to subpar momentum. Elsewhere, commodity currencies underperformed. In addition to lower base metal (copper and iron ore -1.1%) and energy prices (WTI crude -0.5%) there were some currency specific factors also at play. USD/CAD rose (now ~1.4313, its highest since Q1 2020) as the latest Canadian inflation figures, which kept the door open to further BoC rate cuts, were compounded by political upheaval generated by the resignation of the finance minister. NZD (now ~$0.5753) touched a fresh ~2-year low with a softer global dairy auction another drag on the currency. The AUD (now ~$0.6335) also remained in its downtrend and is sitting around levels last traded in November 2023.
With respect to the US Fed decision another 25bp rate cut is looked for (this is ~95% factored in). Attention will be on the Fed’s guidance and updated projections. In our view, markets already look to be anticipating a ‘hawkish’ outcome with the assumed path forward for US interest rates well above the Fed’s ‘dot plot’ (see chart below). Hence, we think that the hurdle to exceed ‘hawkish’ pricing is high. As a result, if upgrades by the US Fed to its 2025/26 forecasts aren’t as aggressive as what is baked in we believe the lofty USD may give back a little ground.
Global event radar: FOMC Meeting (Thurs morning AEDT), BoJ Meeting (Thurs), BoE Meeting (Thurs), US PCE Deflator (Fri night AEDT)
AUD Corner
The AUD has remained under pressure with wobbles in risk sentiment (as illustrated by modestly lower equities, base metals, and energy prices) and lingering global growth concerns in the driver’s seat (see above). At ~$0.6335 the AUD is down around levels last traded in November 2023. The AUD has also been on the backfoot on the crosses. While AUD/NZD (now ~1.1012) and AUD/CAD (now ~0.9066) have consolidated due to the general underperformance across commodity currencies, the AUD weakened by ~0.3-1% versus the EUR, JPY, GBP, and CNH over the past 24hrs. This has pushed AUD/EUR to the bottom-end of its ~3-month range, AUD/GBP down to 2024 lows, and AUD/CNH to where it was tracking in early-August.
As discussed, central banks are in focus over the next few sessions with the US Fed decision (Thurs 6am AEDT) and press conference (Thurs 6:30am AEDT), as well as the BoJ (Thurs, no set time) and BoE meetings (Thurs 11pm AEDT) due. On net, we think the US Fed will deliver another 25bp rate cut, and flag fewer ‘data-dependent’ moves over the next year due to a resilient US economy. But, as markets are driven by how outcomes compare to what is expected, we believe the risks are tilted to the USD softening after the event, which in turn may give the beleaguered AUD a little boost, especially on some of the beaten-up cross-rates. As outlined above, we feel a more measured path forward in terms of US Fed rate cuts is already well priced in and the hurdle to be even more ‘hawkish’ is quite high.
That said, we don’t expect any USD weakness (AUD strength) to last that long or extend too far. As mentioned previously, the enacting of the Trump policy agenda could be USD supportive over coming months, and this should keep the AUD oscillating around ~$0.64 over Q1, in our view (see Market Musings: Trump 2.0 & the AUD). While a firmer USD might act as an AUD headwind, we don’t foresee if falling much further, on a sustained basis, from already depressed levels. In our judgement, a fair amount of ‘negativity’ looks baked in with the AUD trading at a ~4-5 cent discount to our ‘fair value’ models. Statistically, the AUD is also in 'rarefied air'. Since 2015 the AUD has been below where it now sits less than 2% of the time. This is because of the Australia’s elevated terms of trade and structural changes in its capital flow trends. These dynamics remain in place. Additionally, diverging monetary policy trends between the measured RBA and other more aggressive central banks are predicted to generate support for the AUD against EUR, CAD, CNH, and NZD over time.
AUD event radar: FOMC Meeting (Thurs morning AEDT), BoJ Meeting (Thurs), BoE Meeting (Thurs), US PCE Deflator (Fri night AEDT)
AUD levels to watch (support / resistance): 0.6270, 0.6300 / 0.6380, 0.6420
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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