US
USD continues to trade on the defensive. We expect the dollar index (DXY) to hold above its July and September 2025 lows. USD has undershot the level implied by rate differentials and resilient US economic activity suggests the Fed can afford to be patient before resuming easing.
However, structural drags on USD - fading confidence in US trade and security policy, politicization of the Fed, and worsening US fiscal credibility - could outweigh the more neutral cyclical USD backdrop and pull USD lower, like in Q2 last year. Moreover, risk of additional official intervention to weaken USD/JPY can spill over into broader USD weakness against other major currencies.
ADP private employment change for the four weeks to January 3 is due today (1:15pm London, 8:15am New York). The last report showed that for the four weeks ending December 27 private employers added an average of 8k jobs a week while the December ADP jobs print was up 41k.
The January Conference Board Consumer Confidence index is the other data highlight (3:00pm London, 10:00am New York). Consumer confidence is seen recovering to 91.0 after falling to an eight-month low at 89.10 in December. But given the Fed’s concern that downside risks to employment have risen, pay attention to the labor differential index (jobs plentiful minus jobs hard to get) of the report. That index dropped to 5.9pts in December, the lowest since February 2021, and indicative of a rising unemployment rate.
AUSTRALIA
AUD/USD is holding above 0.6900. The NAB December business survey backs RBA cash rate futures’ hike expectations. Both business confidence and business conditions recovered to a two-month high. Capacity utilization edged down to 83.2% vs. 83.5% in November but remains above its long-term moving average, suggesting businesses are using more of their available productive capacity to meet demand.
RBA cash rate futures still imply nearly 60% odds of a 25bps rate hike to 3.85% at the next February 3 meeting. If the December trimmed mean CPI inflation (due tomorrow) tracks above the RBA’s 3.2% y/y December projection, that could seal the deal for a February rate increase and support a firmer AUD. Next resistance levels for AUD/USD are offered at 0.6942 (September 30, 2024 high) and 0.7000.
SOUTH KOREA
KRW is underperforming, while USD/KRW recovered to 1446.00 after hitting a multi-week low of around 1433.60 yesterday. US President Donald Trump announced yesterday that he intends to raise tariffs and “reciprocal tariffs” on automobiles, timber, and pharmaceuticals imported from South Korea from 15% to 25% because “South Korea’s Legislature is not living up to its Deal with the United States.”
Under the trade deal reached last July, South Korea pledged to invest $350bn in the US with a first planned $20bn tranche this year. However, South Korea’s Finance Minister Koo Yun Cheol cautioned last week that “it would be difficult for the funds to be executed within the first half of the year…I don’t know about the second half, but at least it will be difficult in the first half.” Overall, the threat of higher tariffs is a drag on KRW and the broader economy, but reduced capital outflows cushion the currency.
EM WATCH
National Bank of Hungary policy rate decision is today (1:00pm London, 8:00am New York). The bank is expected to keep rates steady at 6.50% for a 16th consecutive meeting. The risk is the bank lays the groundwork for rate cuts this year as inflation is converging towards the bank’s 3% target while parliamentary elections are scheduled for April 12. The swaps market price-in nearly 75bps of cuts over the next twelve months.
Chile’s central bank policy decision is today (9:00pm London, 4:00pm New York). The bank is expected to keep the policy rate on hold at 4.50% after delivering a 25bps cut at its last December 16 meeting. Inflation is tracking the bank’s December projection. The swaps market price-in a total of 25bps of cuts in the next 12 months and the policy rate to bottom at 4.25%. That’s seems about right. Chile’s central bank estimates the neutral policy rate to be between 3.75-4.75%, with the midpoint of this range at 4.25%.
