Market Briefing: Macro trends support the USD
The December edition of our Event Radar & Views In A Nutshell pack is here.
Macro signals. ECB cut rates again. More moves flagged near-term. Diverging trends with US Fed weigh on EUR. USD firm. AUD whipped around.
AU jobs. Another positive labour market report. Unemployment fell back. Odds of a February RBA move have fallen. Helpful for AUD-crosses.
Central banks. Next week focus will be on China data & central banks. BoE, BoJ, & US Fed meet. Will the US Fed signal fewer cuts in 2025?
It has been another busy 24hrs in terms of economic events, although market reactions haven’t been uniform largely due to some of the outcomes failing to match built up expectations. Data-wise, following on from yesterday’s better than anticipated Australian jobs report (see below), US Producer Prices (a gauge of upstream inflation pressures) were a little firmer than anticipated. Core PPI inflation held up at a slightly uncomfortable 3.4%pa in November. While some of the components which feed into the US Fed’s preferred inflation gauge (i.e. the PCE deflator) moderated, there are other signals to suggest the disinflation trend is stalling. Hence, although another US Fed rate cut next week is probable (the market is assigning it a ~95% chance) a more measured approach looks on the cards in 2025. Just over 3 cuts by the US Fed are discounted by next October.
In Europe central banks were in focus. The Swiss National Bank surprised by lowering rates by a larger than projected 50bps as it attempts to stem gains in the CHF. The European Central Bank lowered its policy rate by 25bps. This takes the ECB’s cumulative easing so far this cycle to 100bps as it tries to prop up the sluggish Eurozone economy. ECB policymakers have indicated there is more to come over the next few meetings, however comments that moves will be ‘data-dependent’ and on a ‘meeting-by-meeting’ approach, as well as projections showing Eurozone inflation hovering around the ~2%pa target over the next few years has seen markets temper their views about how low interest rates might reach next year. Markets are looking for the ECB policy rate (now 3%) to fall to ~1.75% by October.
With respect to the numbers, bond yields across Europe and the US rose with 10yr rates in Germany increasing ~8bps (now ~2.20%) and ~6bps in the US (now ~4.33%). The latter has taken a bit of heat out of the US stockmarket with the S&P500 (-0.4%) and tech-focused NASDAQ (-0.7%) partially unwinding yesterday’s gains. In FX, the USD has remained firm with EUR ending the day lower (now ~$1.0473). GBP has also weakened (now ~$1.2674), and USD/JPY (now ~152.60) consolidated. Elsewhere, USD/SGD (now ~1.3470) has edged up towards the top of its 5-month range, while NZD has continued to struggle (now ~$0.5767, near its 2024 lows) and the AUD has given back its post Australian labour report uptick (now ~$0.6365).
There is limited global data released today. Next week attention will be on central banks with the Bank of England, Bank of Japan, and US Fed meeting. We believe the US Fed should cut interest rates again, but it could also flag fewer moves in 2025. In our view, the US’ economic strength, upward shift in US interest rate expectations, and the Trump policy agenda are factors that can keep the USD supported.
Global event radar: China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD Corner
The AUD has experienced another burst of short-term volatility over the past 24hs with positive Australian economic data counteracted overnight by a firmer USD stemming from the uptick in US bond yields and a softer EUR. On net, at ~$0.6365 the AUD is little changed from where it was tracking this time yesterday with the currency still trapped near the bottom-end of its multi-month range. That said, in a reflection of how influential the USD has been, the AUD has nudged up on most of the major crosses with gains of ~0.1-0.5% recorded versus the EUR, GBP, NZD, and CAD.
Locally, as mentioned, the latest read on the Australian jobs market was released yesterday. And despite all of the doom and gloom reporting on the economy, the data once again positively surprised. 35,600 jobs were added in November with full-time leading the charge (+52,600, part-time fell 17,000). This combined with a slight dip in labour supply saw the unemployment rate dip to 3.9%. Broader measures of labour market slack also improved with underemployment falling (now 6.1%). Despite GDP growth losing steam, as we have noted before, the level of activity across the economy (especially the labour-intensive services industries and public sector) remains high. This continues to underpin the labour market, and is helping hold down unemployment in the face of the jump up in the population. On net, the unemployment rate hasn’t moved in the past year with a net ~334,000 jobs created over this time.
Notably, as our chart shows, unemployment is also tracking better than the RBA was anticipating. This may lessen the RBA’s 'confidence' that inflation is on a sustainable path back to target. As a result, the data has cooled the markets jets about the prospect of a February RBA rate cut (now a ~50/50 bet) with the first move not fully factored in until May. We think this is about right based on how we see things panning out locally. The resilience in the labour market also supports our long-held assessment that the RBA will lag its peers in terms of how far it goes during the easing cycle. Over the medium-term, we believe diverging policy trends and widening yield differentials in Australia's favour should be AUD supportive against currencies such as the NZD, EUR, CAD, and CNH. This can also help cushion the impact of a firmer USD generated by the Trump policy agenda, and limit further downside in AUD/USD. We are forecasting the push-pull forces to keep the AUD oscillating around ~$0.64-0.65 over the next few quarters (see Market Musings: Trump 2.0 & the AUD).
AUD event radar: China Data (16th Dec), FOMC Meeting (19th Dec), BoJ Meeting (19th Dec), BoE Meeting (19th Dec)
AUD levels to watch (support / resistance): 0.6300, 0.6340 / 0.6440, 0.6500
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (13th December)
JPY Tankan Survey (Q4) (10:50am)
AUD RBA’s Hunter Speaks (12:30pm)
GBP GDP – Monthly (Oct) (6pm)
EUR ECB’s Holzmann Speaks (8pm)
EUR Industrial Production (Oct) (9pm)
*Note, all times/dates provided are AEDT
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