Winds of Change
- RBA delivers a dovish hold. AUD underperforms and Australian bonds outperform across the board.
- Norway inflation ran hot in November. Norges Bank on track to keep rates steady until March.
- The US NFIB small business optimism index is up next. There are no policy-relevant UK or EU economic data releases today.
USD pared back some of yesterday’s modest gains. We are sticking to our long-held bullish USD view in part because the US macro backdrop suggests the Fed easing cycle will be shallower than current implied by Fed funds futures - roughly 100bps of cuts over the next 12 months.
The US economy is still tracking above long-run annual trend growth of 1.8% as the Atlanta Fed GDPNow model estimates real GDP growth of 3.3% SAAR in Q4. Moreover, recent data have raised the possibility that progress on inflation may be stalling above 2%. The New York Fed median one-year ahead expected inflation rate ticked-up to 2.97% vs. 2.87% in October. The NFIB small business optimism index is up next (11:00am London).
AUD/USD and Australian government bond yields plunged after the RBA delivers a dovish hold. The RBA kept the cash rate target at 4.35% as was widely expected but set the stage for a policy rate cut in February. First, the RBA scrapped its previous neutral policy guidance that “the Board is not ruling anything in or out”. Second, the RBA noted “the Board is gaining some confidence that inflation is moving sustainably towards target”, adding that “some of the upside risks to inflation appear to have eased.” Previously, the RBA warned of “the need to remain vigilant to upside risks to inflation.”
Meanwhile, RBA Governor Michele Bullock was deliberately vague about future monetary policy adjustment. Bullock reiterated the Board did not explicitly discuss interest rate cut or raising rates either, and declined to lay out a scenario for a February rate cut. Regardless, AUD/USD is vulnerable to more downside as market ramp-up bets of a February rate cut. Cash rate futures raised the probability of a February 25bps cut to as much as 70% vs. 50% before today’s RBA policy rate decision.
NOK ignored Norway’s hot November CPI print. Headline slowed less than expected to 2.4% y/y (consensus: 2.3%) vs. 2.6% in October while underlying CPI inflation rose three ticks to 3.0% y/y (consensus: 2.8%, Norges Bank Q4 forecast: 3%). At its last November 6 meeting, the bank emphasized that “the policy rate would most likely be kept at 4.5 percent to the end of 2024.” A first full 25bps rate cut is priced-in for March which is in line with the Norges Bank’s policy guidance. Bottom line: monetary policy divergence between Riksbank and Norges Bank suggests NOK/SEK can edge higher.
EUR/GBP recovered slightly after testing key support around 0.8270. Yesterday, UK Chancellor of the Exchequer Rachel Reeves confirmed the UK and EU will begin formal talks on a reset of their relationship next year. Reeves said she’d be “more ambitious” in strengthening their economic relationship. While there is no plan for the UK to rejoin the single market, there is room for greater cooperation with the EU namely in security and foreign policies. Overall, monetary policy trend between the ECB and BOE still favors a lower EUR/GBP.
USD/JPY is holding on to most of yesterday’s gains and markets continue to place low odds (25%) the Bank of Japan resumes normalizing rates next week. We agree. Japan’s disinflationary trend is intact, and the growth outlook is unimpressive. Japan’s Q4 BSI survey is the next domestic highlight (11:50pm London).
USD/CNH remains under downside pressure and Chinese stocks rallied on expectation Chinese policymakers crank-up stimulus next year to support the economy. In the meantime, China’s November trade data continues to point at weak domestic demand activity. China’s trade surplus widened in November because of an unexpected decline in imports. The trade surplus rose to $97.44bn (consensus: $93.5bn) vs. $95.72bn in October as exports increased 6.7% y/y (consensus: 8.7%) while imports fell -3.9% y/y (consensus: 0.9%). China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate consumer spending. Net exports are too small to matter.