• Central banks. US equities ticked up. No change by US Fed. USD a bit weaker. Bank of Canada lifts rates. RBNZ surprised by holding steady. NZD tumbled.
• CPI & RBA. Australian Q3 inflation firmer than expected. Odds of another RBA hike next week rise. AUD extends its upswing. Will the RBA deliver?
Global Trends
Central bank meetings and shifts in interest rate expectations have been in focus over the past 24hrs. On balance, the tone across markets has remained positive. US equities edged up again (S&P500 +0.3%), the US yield curve flattened a little as 2yr rates dipped (-4bps to ~4.7%) and the 10yr nudged up (+2bps to ~5.02%), and the USD index lost a bit of ground. EUR rose but remains close to its multi-quarter lows (now ~$1.1156), and GBP ticked up (now ~$1.3327). On the back of the RBNZ’s ‘shock’ decision to keep interest rates steady yesterday the NZD tumbled ~1% towards the lower end of its range (now ~$0.5626), while hotter than anticipated Australian CPI inflation supported the AUD as traders’ factored in a greater chance of a Melbourne Cup day rate hike (now ~$0.7053).
In addition to the RBNZ, there were a couple of other central bank meetings overnight. The Bank of Canada kicked off its cycle with the 25bp rate rise the first tightening step in more than three years. At 2.5% the policy rate in Canada is still fairly low, and Governor Macklem noted that “there could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully”. In the US, as widely expected, the Federal Reserve was on hold, although 2 out of the 12 members did vote for another rate hike. The post meeting statement and comments by Chair Warsh in the press conference indicated the ‘pause’ was to allow the “accumulation of more information”. Given the “strong” underlying pulse of the US economy, price pressures, and not overly tight financial conditions, more policy action may be required to get inflation to target in a timely manner, in our view. Hence, we believe another Fed rate hike in December remains a real possibility, and that ~1-2 more steps in H1 2027 could also be on the table.
Looking ahead, the ECB meets tonight (12:15am AEDT), and in the US the first estimate of US Q3 GDP and the PCE deflator (the Fed’s preferred inflation gauge) are released (10:30pm AEDT). No change in policy is expected by the ECB, though it may look to calm fears about Eurozone sovereign debt risks by stressing it has the tools to ward off systemic threats to the economy. In the US, Q3 growth should be solid, however it may not exceed elevated consensus predictions. As outlined before, outcomes compared to expectations drive markets. As positioning (as measured by CFTC futures) is ‘net long’, and with it tracking above our ‘fair value’ model, we think the USD has scope to drift back further into the end of the month (barring a sustained deterioration in risk sentiment).
Trans-Tasman Zone
Contrasting fortunes for the NZD and AUD over the past 24hrs with the former underperforming and the latter adding to its positive run. In terms of the AUD (now ~$0.7053), Q3 Australian CPI data bolstered expectations that the RBA may hike interest rates again next Tuesday. The quarterly ‘trimmed mean’ (the core inflation gauge that strips out some of the noise) rose 1%qoq, pushing up the annual run rate to 3.7%pa. This would be uncomfortable for the RBA given it is running north of its August projections.
In Australia price pressures are high and broad based given global forces as well as domestic factors like the elevated level of demand (due to the larger population and government spending), and construction costs on the back of the data centre roll out. The firm underlying inflation pulse requires a policy response, in our opinion. Markets agree with another RBA increase next week assigned a ~85% chance and a move fully factored in by the December meeting. The key question is whether one more move will be enough to break the back of inflation? Decisions aren’t costless. The higher interest rates go the larger the potential negative impact on private sector activity and the jobs market. We think that there could be some more AUD strength in the near-term on the back of the upward repricing in RBA expectations, especially as positioning metrics indicate participants remain ‘bearish’/’net short’, and as the late October-December period has historically been a ‘seasonally’ positive time of the year for the currency. However, moves beyond ~$0.71-0.72 still look unsustainable over the medium-term, in our view, given the worsening domestic growth trajectory created by higher interest rates.
Across the Tasman, the RBNZ went against the grain by holding rates steady. Markets were pricing in a ~90% chance of a rate hike yesterday. This caused the NZD to slump ~1% (now ~$0.5626). The macro crosscurrents propelled AUD/NZD to levels last traded in Q1 2013 (now ~1.2536). The large knee-jerk moves in the NZD, and especially AUD/NZD, look overdone, in our opinion. The door to the RBNZ delivering more tightening over the next year remains open, NZ growth momentum is improving, and agricultural prices are elevated. These should be NZD supportive factors over the medium-term. Indeed, the on-hold outcome was tight with the RBNZ voting 4-3 in favour of no change. The commentary also indicated it was more of a timing issue, not direction, with all members agreeing that “tighter monetary policy is likely to be required”. We believe the NZD is undervalued, and too many negatives might be priced in. The NZD is tracking ~3-4 cents below our ‘fair value’ estimate, and AUD/NZD looks quite stretched compared to various metrics like yield spreads and on broader valuation models. AUD/NZD is also around ‘overbought’ levels on momentum indicators like the RSI.
