Market Briefing: Inflation & the AUD
Read the 2025 Currency Outlook from Corpay Currency Research
Central banks. Another rate cut by the BoC & Riksbank, although forward guidance was removed. US Fed kept rates steady & signaled patience.
Modest moves. Mixed performance across equities. Bond yields ticked up. USD tread water. ECB expected to cut rates tonight. US GDP also released.
AU CPI. Core inflation slowed bolstering expectations for a February RBA rate cut. A rates recalibration is looming, but is the low AUD already factoring this in?
Global Trends
There were few data releases overnight and no new news regarding President Trump’s policy agenda, particularly around tariffs. Rather, central banks were in the spotlight. As expected, the Bank of Canada and Sweden’s Riksbank both lowered interest rates by 25bps. However, they also removed forward guidance about future moves. The BoC, which has delivered 2%pts of rate reductions since last June, noted that the tariff threats cloud the outlook. Hence, policymakers will be more cautious in the period ahead as they watch developments.
In the US, the Federal Reserve kept interest rates on hold. This was also anticipated and is the first time since the Fed kicked off its easing cycle last September that no adjustments were made. According to Fed Chair Powell policy is in a “good place” with the committee in “no hurry” to act again as it adopts a “wait and see” approach and assesses the impact of new government policy. That said, with Chair Powell also proclaiming the Fed’s stance remains “meaningfully restrictive” a further recalibration lower of interest rates still looks on the cards down the track if US inflation cools and/or the labour market weakens. As our chart shows, markets continue to pencil in some more easing by the US Fed with another rate cut by mid-year and almost a second by late-2025 discounted. This is broadly inline with the Fed’s ‘dot plot’. Notably, the current market outlook is on par with where it was in March 2024, yet the USD is ~3.5% higher than it was back then.
In terms of markets, net moves have been modest. European equities edged higher (EuroStoxx600 +0.5%) while the US indices slipped back a bit (S&P500 -0.6%). US and European bond yields nudged up ~1-3bps with the US 2yr rate hovering near ~4.22%. Commodities were mixed with WTI crude oil losing ground (-1.3%) and industrial metals like copper and iron ore rising ~0.9%. In FX, the USD index is little changed from where it was this time yesterday. USD/JPY (now ~155.34) is towards the lower end of its multi-week range, GBP tread water (now ~$1.2443), and ahead of tonight’s ECB meeting where another interest rate cut is predicted (12:15am AEDT) EUR is holding just above ~$1.04. Closer to home, the NZD (now ~$0.5654) has softened a touch, as has AUD (now ~$0.6231) with yesterday’s lower than forecast Q4 CPI inflation bolstering expectations the RBA could start cutting interest rates next month.
In addition to the ECB decision, Eurozone GDP (9pm AEDT) and US GDP (12:30am AEDT) are also due tonight. While US growth is projected to decelerate the data should again illustrate the US’ relative strength over the Eurozone. We think this and the looming US tariff risks (recall President Trump has said tariffs could be imposed on Canada, Mexico, and China on 1 February) can be USD supportive.
Global event radar: EZ GDP (Tonight), ECB Meeting (Tonight), US GDP (Tonight), EZ CPI (3rd Feb), US ISM (4th Feb), BoE Meeting (6th Feb), US Jobs (8th Feb)
Trans-Tasman Zone
The AUD has remained on the backfoot over the past 24hrs (now ~$0.6231) with a soft Q4 CPI inflation report reinforcing expectations that the RBA will kick start its policy easing cycle on 18 February. The NZD (now ~$0.5654) has been dragged along for the ride, with the AUD also shedding ~0.2-0.5% against the EUR, GBP, JPY, CAD, and CNH. That said, the moves in the AUD and NZD have been relatively modest with both now tracking where they were a week ago and inline with their respective 1-month averages.
In terms of the Australian data, headline inflation rose just 0.2% in Q4 with the annual rate running at 2.4%pa. The trimmed mean (i.e. the RBA’s preferred underlying gauge) came in at 0.5%qoq. As a result, core inflation decelerated to 3.2%pa, below where the RBA was forecasting it to be. In our opinion, the data should bolster the RBA’s belief that inflation is heading back to target on a sustainable basis and see it announce some interest rate relief on 18 February. That said, we remain of the view that this cycle will be more akin to a 'recalibration' in settings to match the stepdown in inflation rather than the start of a sharp adjustment in interest rates. In our judgement, the stickiness in prices across services and discretionary categories on the back of the resilience in the Australian jobs market, still high level of activity across labour-intensive sectors, and robust growth in public demand means this RBA easing cycle could be limited and drawn out. We believe quarterly moves down towards ‘neutral’ (i.e. ~3.35%) over the next year appears the most likely course.
With respect to the AUD, although the timing of the first RBA step has been brought forward (markets are assigning a ~93% chance of a cut in February), the cycle outlook hasn’t materially changed. Interest rate markets are pricing in just over three cuts in 2025. All up, we continue to think that the RBA will lag several of its global peers in terms of how much interest rate relief is delivered. This divergence can be AUD supportive on crosses such as AUD/EUR. With the AUD trading at a discount to fundamentals (it is tracking ~4 cents below our ‘fair value’ models), an underlying bearishness embedded (‘net short’ AUD positioning, as measured by CFTC futures, is elevated), and it not sustainably trading much below where it is in recent times (the AUD has only been sub-$0.62 ~1% of the time since 2015) we think further near-term downside should be limited. At the same time however, with US trade tariff risks still lurking and the USD firm, any near-term AUD rebounds are also likely to be capped. As per our 2025 outlook we see the AUD oscillating in the low- to mid-$0.60s over coming months as domestic and offshore cross-currents play out.
AUD & NZD event radar: EZ GDP (Tonight), ECB Meeting (Tonight), US GDP (Tonight), AU Retail Sales (3rd Feb), EZ CPI (3rd Feb), US ISM (4th Feb), NZ Jobs (5th Feb), BoE Meeting (6th Feb), US Jobs (8th Feb)
AUD levels to watch (support / resistance): 0.6170, 0.6200 / 0.6280, 0.6320
NZD levels to watch (support / resistance): 0.5600, 0.5620 / 0.5690, 0.5720
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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THURSDAY (30th January)
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