Market Briefing: From Russia, with love
Geopolitics. A burst of volatility on the back of Russia/Ukraine news. But sentiment rebounded. US equities rose, as did the NZD & AUD.
Data flow. UK CPI & EZ wages due tonight. Several ECB & US Fed members also speaking. Geopolitics will also be on the radar.
AUD trends. AUD outperforming on the crosses. We think this can continue given the diverging policy trends between the RBA & others.
Geopolitics generated a burst of volatility overnight. News Ukraine had carried out its first strike just over the Russian border using Western supplied missiles, and reports President Putin had signed an updated doctrine which included the possibility of a nuclear response to aggression by non-nuclear states that are supported by nuclear powers initially unnerved markets. However, subsequent comments by Russia’s Foreign Minister that they are “strongly in favour of doing everything not to allow nuclear war to happen” calmed nerves and knee-jerk risk-off moves reversed.
On net, US equities ended the day higher with the tech-focused NASDAQ outperforming (+1% vs S&P500 +0.3%) while long end bond yields in the US and Europe closed ~2-3bps lower. The benchmark US 10yr yield is hovering around 4.39%, still towards the upper end of its 5-month range. Odds of a 25bp rate reduction by the US Fed at its mid-December meeting are sitting at ~60%, with only ~3 moves discounted by end-2025. In line with prior comments by Chair Powell, and typical central bank policy, the Fed’s Schmid indicated that incoming tariff and immigration policies will be important but that policymakers will only react to them once they have been enacted into law. Base metal and energy prices also ticked up with iron ore back over US$101/tn and WTI crude oil approaching ~US$70/brl. In FX, the USD was whipped around a bit as initial safe-haven demand unwound later in the session. The result is that the EUR (now ~$1.0592), GBP (now ~$1.2677), and USD/JPY (now ~154.73) are broadly inline with where they were tracking this time yesterday. Elsewhere, USD/CAD dipped (now ~1.3970) with firmer oil prices compounded by an upside surprise in Canadian inflation. The unanticipated re-acceleration in Canadian core inflation (from 2.4%pa to 2.6%pa) has seen expectations for a 50bp rate cut at the Bank of Canada’s December meeting whittled back. The reversal in risk appetite also saw the NZD (now ~$0.5909) and AUD (now ~$0.6528) extend their rebounds.
Tonight, UK CPI inflation (6pm AEDT) and the ECB’s wages indicator (9pm AEDT) are due. Several ECB and Fed members are also speaking. In our opinion, signs UK price pressures and/or Eurozone wages (a driver of future inflation) are cooling could give the USD renewed support. We believe the diverging policy trends between the ECB and US Fed should act as a medium-term EUR headwind. As it is the major USD alternative this would also help underpin the USD which we believe should also stay ‘stronger for longer’ because of the growth/inflation and interest rate spillovers generated by the Trump policy agenda (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
Intra-session moves in various asset markets, including the USD, caused by Russia/Ukraine geopolitical developments generated a modest amount of AUD volatility overnight (see above). However, as cooler heads prevailed and risk sentiment improved the AUD extended its upswing to be back near ~$0.6530 (~1.5% above its recent lows and where it was trading a week ago). The AUD also pushed higher on most of the major crosses with gains of ~0.3-0.5% recorded against the EUR, JPY, GBP, and CNH. AUD/EUR (now ~0.6163) is within striking distance of its 2024 peak, while AUD/JPY (now ~101) is above its 1-year average.
Locally, the minutes of the last RBA meeting were released yesterday. While a lot of the rhetoric wasn’t new we would flag that the Board indicated it will “need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”. As the 0.8% increase in Q3 core CPI wasn’t viewed as overly ‘good’ this suggests that barring a labour market shock and/or drop off in activity, the Q4 and Q1 CPI prints may need to show improvement before rate cuts are on the table. This is inline with our thinking that the start of a limited/gradual RBA easing cycle is a story for late-H1 2025. Markets are fully discounting a 25bp RBA rate cut by May, with a second move not priced until the end of the year.
As outlined previously, we believe 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. This can offset the drag created by further modest USD appreciation, which we believe is likely over coming months as the Trump policy platform of trade tariffs, greater fiscal spending, and steps to curb US immigration are enacted and priced into markets. In our view, this could cap the AUD’s medium-term upside (i.e. we now see the AUD tracking in the mid-$0.60s over the next year) (see Market Musings: Trump 2.0 & the AUD). But at the same time, in addition to relative outperformance on the crosses we also see other factors that should limit the AUD’s downside. A fair degree of negativity already looks factored in 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) due to the higher terms of trade and improvement in Australia’s trade/current account position.
AUD event radar: RBA Gov. Bullock Speaks (Thurs, 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
WEDNESDAY (20th November)
JPY Trade Balance (Oct) (10:50am)
CNY Loan Prime Rate (1yr/5yr) (12pm)
GBP CPI Inflation (Oct) (6pm)
EUR ECB Wages Indicator (Q3) (9pm)
THURSDAY (21st November)
GBP BoE’s Ramsden Speaks (3am)
USD Fed's Cook Speaks (3am)
USD Fed's Bowman Speaks (4:15am)
EUR ECB’s Guindos Speaks (5am)
EUR ECB’s Stournaras Speaks (5:30am)
EUR ECB’s Makhlouf Speaks (6am)
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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