Hawkish Hold by the RBA; Will the Fed Deliver a Hawkish Cut Tomorrow? snbchf.com

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Marc Chandler
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Hawkish Hold by the RBA; Will the Fed Deliver a Hawkish Cut Tomorrow?

Overview: The US dollar is sporting a slightly softer profile against the G10 currencies today. The exception is the yen, which is trading at a seven-day low against the greenback. The Scandis and Australian dollar are doing best. The Reserve Bank of Australia delivered a hawkish hold. Governor Bullock's comments encouraged the market to bring forward the first rate hike, which is now nearly fully discounted in the futures market for next May. France's parliament holds an important vote today on social security financing, and a defeat would likely weigh on the euro. Meanwhile, there is much talk of a hawkish cut from the Federal Reserve tomorrow. Most emerging market currencies are also firmer against the US dollar today. This includes the Chinese yuan, even though the PBOC set the dollar's reference rate higher today for the third consecutive session.

Outside of Japan, most of the large bourses in the Asia Pacific region fell today, led by more than 1% losses in the Hang Seng and the index of mainland stocks that trade there. Europe's Stoxx 600 is trading with a slightly heavier bias for the third consecutive session. US index futures are broadly steady. Apart from Australia and New Zealand, which saw 10-year yields rise around five basis points today, other benchmark yields are softer. Japanese and most European yields are a 1-2 basis points lower. The 10-year US Treasury yield is little changed near 4.16%. Gold continues to straddle $4200 in uneventful even if choppy price action. January WTI extended yesterday's pullback from over $60 and dipped briefly below $58.60 before finding bids that lifted it back above $59.

USD: The Dollar Index forged a near-term basis around 98.75 and is consolidating below 99.20. The 99.40-99.45 area offers important resistance. It houses the 200-day moving average and the (38.2%) retracement of the leg down from the November 21 high (~100.40), which was the last time is settled above 100.00. The US reports the September and October JOLTS data today. It may be too confusing to have much market impact, especially ahead of tomorrow's FOMC decision, for which the Fed funds futures are pricing in near-certainty for a rate cut. It is widely recognized that the decision will not be unanimous. Earlier in the cycle some complained about unanimity, and now there are complaints of a fragmented Fed. Reasonable people may differ over several aspects, like the inflationary impact of tariffs, the neutral rate, and the desired level of bank reserves.

EURO: The euro reached the upper end of a two-month range but has stalled, despite the Germany economic engine finding traction with strong (October) factory orders and industrial output figures and ECB President Lagarde admitting she has not problems with the market pricing in a hike. That said, the swaps market is pricing in a small chance of a hike (~12%) by the end of next year. In the last four sessions, the euro has been confined to about a $1.1620-80 range. It is in a narrow $1.1635-$1.1655 range so far today. The market is watching French parliament vote on the social security financing and the French premium over Germany has widened in recent days. The bill and the budget need to be passed before the end of the year.

CNY: Last Thursday, the dollar traded between about CNH7.0560 and CNH7.0720 and remains in that range. Press reports cite some Chinese academics echoing the remarks of foreign critics calling on Beijing to allow greater yuan appreciation. Yet, since April, officials have allowed the yuan to rise by about 4%, which is the largest rise in the past three years. Still, the PBOC appears to have sought to stabilize the exchange rate in recent days. The PBOC set the dollar's reference rate a little higher for the third consecutive session (CNY7.0773 vs. CNY7.0764 yesterday). Tomorrow China reports November CPI and PPI. Deflation and disinflation appear to be ebbing.

JPY: The rise in US rates seems to be a better explanation for the dollar's gains against the yen than the powerful earthquake that struck. Often, when faced with a natural disaster, Japanese insurance companies sell foreign assets to service local claims. The 10-year US Treasury yield traded near 3.96% at the end of November and reached almost 4.19% yesterday, its highest level since late September. The two-year yield rose from about 3.45% at the end of November to a little above 3.60% yesterday. For its part, the dollar settled last month near JPY156.20 and fell to around JPY154.35 before the weekend. It reached almost JPY156.00 yesterday, meeting nearly the (50%) retracement of its decline from the November 20 high (~JPY157.90). The next retracement (61.8%) is ~JPY156.55, which it has approached today (~JPY156.45). A push above there targets JPY157 initially.

GBP: Sterling rallied a couple of cents (~$1.3180-$1.3385) last Tuesday through Thursday. It drifted lower and approached $1.3300 yesterday, the (38.2%) retracement of last week's rally. News yesterday that Japanese investors bought almost JPY419 bln of UK Gilts in October, the most since January 2021, failed to have much impact. Sterling is trading with a firmer bias today and is in a $1.3320-55 range. The swaps market has a BOE rate cut next week nearly fully discounted. The October GDP to be reported at the end of the week, could be the first increase since June, is unlikely to deter expectations.

CAD: The US dollar extended its pre-weekend slump against the Canadian dollar yesterday to CAD1.38, the lowest level since late September. As the greenback recovered yesterday and reached CAD1.3860. This has held today, and the US dollar drifted back to CAD1.3840. The Bank of Canada is seen on hold tomorrow, and the most important element to watch for is whether officials push against the swing in sentiment that has a hike now fully discounted in the swaps market in early Q4 26. The correlation of changes of the USD-CAD exchange rate and the Canada's two-year yield on a rolling 30-day basis, reached almost -0.50 yesterday, the most since late March when it was near -0.65.

AUD: As widely expected, the Reserve Bank of Australia left its overnight cash target rate steady at 3.60%. While the accompanying statement was neutral, Governor Bullock's remarks were more hawkish. She suggested additional cuts may not be needed and the issue it faced now was whether to have an extended pause or prepare to hike rates. The futures market, which had a little more than a 70% chance of a hike by the middle of 2026, now has the first hike fully discounted by next June and more than a 90% chance it takes place in May. Despite the hawkish hold, the Australian dollar had stalled last Friday and yesterday near $0.6650, culminating a 4.25-cent rally since November 21. The Aussie looks to have a running start at it now. It took out the previous session's low initially for the first time in nine sessions and is now around $0.6640. A break of the $0.6650 area signals a return to the year's high, set September 17, a little above $0.6700. Australia's November jobs report will be released early Thursday. The unemployment rate is expected to tick up to 4.4% from 4.3% in October. It had been at 4.3% since June before rising to 4.5% in September, the cyclical high.

MXN: Risk-off and some profit-taking by momentum traders helped lift the dollar to about MXN18.2550 yesterday. The peso's roughly 0.45% loss yesterday was the largest in two weeks. It was the weakest among Latam currencies. The dollar has risen to MXN18.28 today. The US has threatened a 5% tariff on Mexico is if does not release water, which the US claims it ought to under a 1944 treaty. Meanwhile, Mexico reports November CPI today. The headline is expected to rise to almost 3.7% from a little below 3.6%. It would be the third increase in four months. The core rate is seen edging up to a little over 4.3%, which would be the highest since April 2024. It has been above 4% since May. The central bank targets inflation (headline and core) in a 2%-4% range. Still, more immediately the central bank is more concerned about the risks of a recession after the economy contracted 0.3% in Q3. Meanwhile, the Brazilian real stabilized but remains fragile after shedding a little more than 2.5% before the weekend on news that former President Bolsonaro will support his son's presidential bid next year. The greenback reached BRL5.4840 before the weekend and pulled back to BRL5.3865 yesterday where dollar buyers re-emerged and sent it back to around BRL5.45. A push above last Friday's highs targets the mid-October highs in the BRL5.52 area.

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About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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