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10 Dec 2024

10 Dec 2024

After leading the global central bank charge, the Reserve Bank is now aggressively reversing course

The impact of the Reserve Bank of New Zealand’s previous aggressive policy tightening—which was aimed at bringing down rampant inflation—is still working its way through the system. This is a key factor behind the country’s current economic difficulties. New Zealand has effectively been in recession for two years, with the step down in activity clearly manifesting in interest rate-sensitive sectors, the labour market, and inflation. Leading investment and spending gauges are pointing to below-potential growth persisting well into 2025, with unemployment set to trend higher, and price pressures receding due to greater ‘excess capacity’. Economic weakness points to a further...

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10 Dec 2024

The yen could regain ground over the year ahead

The Japanese yen—which is tracking below where various fundamental drivers are implying it should be—could claw back ground over the year ahead, even against a relatively-firm US dollar. From our perspective, the currency should benefit from a confluence of factors. Increased geopolitical, macro, and market volatility: A sustained increase in turbulence should enhance the yen’s counter-cyclical properties, giving it room to appreciate. The yen typically benefits during periods of market turbulence.Cross asset volatility, z-score, lookback to 2005January 2016 – November 2024 Further policy normalisation by the Bank of Japan: The tightness in labour markets is feeding through to wages, and...

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10 Dec 2024

The Aussie dollar is caught in a crossfire between domestic fundamentals and external risks

In the face of a firmer US dollar and US-related trade risks, the Australian dollar could linger in the mid-$0.60s over the first half of 2025 before undertaking a gradual rope climb higher later in the year: Market volatility is likely to pick up over coming months as US President-elect Trump enacts his policy agenda—but forward-looking currency markets have already partially priced in this risk, with the exchange rate trading at a discount to our various ‘fair value’ estimates. Authorities in China are likely to offset US tariff-induced export pain through a series of increases in internally focused infrastructure investment....

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10 Dec 2024

Geopolitical and macroeconomic headwinds could blow harder in 2025

The Chinese renminbi should steadily weaken against the US dollar, and struggle against other currencies such as the Australian dollar, Japanese yen, and euro over the next few quarters. In our judgement, the pricing-in and enacting-of US President-elect Trump’s trade policies will likely see a greater risk premium attached to the yuan, given the economic headwinds the protectionist measures may create for an already structurally-unbalanced Chinese economy, which has stumbled through its post-COVID recovery. There’s a lot more to China’s exports than the USShare of China’s goods exports, %December 2013 – October 2024 Headwinds could increase as policymakers attempt to...

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10 Dec 2024

A repricing in policy expectations could weaken sterling in the early new year, but economic resilience points to a recovery ahead

The British pound faces a turbulent outlook in 2025, shaped by conflicting domestic and international forces: After a distinct loss of economic momentum in 2024, labour markets are softening, putting wage gains under pressure and driving inflation expectations lower. We think the Bank of England will cut rates more aggressively than markets anticipate in the near term, limiting the extent to which interest differentials can support the currency against the euro.  A period of outperformance has not been sustained.Contribution to monthly change in GDP, 3-month moving average, %January 2022 – September 2024 But the UK’s services-focused industrial structure offers some...

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