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• Mixed fortunes. Equities in China tumbled, while the US S&P500 hit a record. US bond yields rose, supporting the USD. AUD lost ground.
• RBNZ cuts. RBNZ slashed rates by 50bps. The harsher NZ economic climate points to more cuts. Diverging trends point to a higher AUD/NZD.
• US CPI. US inflation in focus. Headline CPI projected to slow, while core CPI forecast to hold steady. US yields & USD will be sensitive to the data.

A mixed performance across global markets over the past 24hrs. After its stellar run equities in China tumbled (CSI300 -7%) because of ongoing uncertainty regarding further policy stimulus. China’s Ministry of Finance indicated that it will hold a briefing on fiscal policy on Saturday. Time will tell whether it will be enough to appease investors. That said, the drop in China didn’t spillover into other regions with equities across Europe and the US edging higher. The US S&P500 (+0.7%) hit another record high in the process, with US CPI inflation in focus tonight.

Elsewhere, bond yields rose with the benchmark US 10yr rate up another ~6bps. At ~4.07% the US 10yr is at its highest level since early-August. The US 2yr (now ~4.02%) also extended its upswing as markets tempered their US Fed rate cut expectations. Traders are now factoring in a ~21bp rate reduction by the US Fed in November, with ~122bps of easing factored in by mid-2025. This is down from ~166bps at the start of the month. The minutes of the last Fed meeting indicated that the 50bp rate cut in September wasn’t viewed as necessary by all with “some” members pushing for a 25bp move. While further rate cuts by the US Fed should be anticipated given the downside labour market risks and diminished upside inflation worries, a slower path of rate reductions looks likely. At least that’s what the Fed’s Logan flagged when speaking overnight. In FX, the higher US yields has generated USD support. EUR (now ~$1.0940) is hovering near a ~2-month low, GBP (now ~$1.3060) is at the bottom of its 1-month range, and the interest rate sensitive USD/JPY (now ~149.35) is tracking towards the top of the range it has occupied since August. The backdrop has exerted a bit more downward pressure on the AUD (now ~$0.6712), while NZD underperformed (now ~$0.6055) after the RBNZ slashed its cash rate by 50bps to 4.75% yesterday.

In addition to geopolitical developments in the Middle East, and policy announcements in China, markets will also be lasering in on the September US CPI data (11:30pm AEDT). While headline inflation is forecast to decelerate further (mkt 3.2%pa from 3.5%pa), core inflation is projected to hold steady at 3.2%pa. Given US interest rate expectations have already adjusted meaningfully and are now broadly inline with the US Fed’s ‘dot plot’ projections, we believe further near-term upside in the USD could be limited and that the larger (and more negative) reaction in US yields and the USD might stem from an unexpected undershoot in US inflation.

AUD Corner

The USD’s resurgence, generated by the upswing in US bond yields, has kept the AUD on the backfoot (see above). At ~$0.6712 the AUD has dipped down towards its 3-month average and is now over 3% below last week’s peak. That said, the AUD’s performance on the crosses has continued to be mixed. AUD/EUR (now ~0.6140) is near a 2-week low, AUD/GBP has slipped back below its 50-day moving average (~0.5139), AUD/CNH (now ~4.7625) is tracking close to its 1-year average, while AUD/JPY has nudged a bit higher (now ~100.25).

AUD/NZD has also risen (now ~1.1085) to the top end of its 2-month range with the NZD weighed down by yesterday’s move by the RBNZ to lower interest rates by 50bps. This puts the RBNZ’s cash rate at 4.75%. According to the RBNZ inflation is back in the 1-3%pa target band, activity is subdued with business investment and consumption weak, employment conditions have continued to soften, and the NZ economy has ‘excess capacity’. This is inline with our assessment of the state of play with the RBNZ’s previous aggressive tightening a key factor behind the harsher NZ economic climate. Based on current trends, and with the RBNZ’s policy stance still too tight, dropping the level of interest rates via outsized 50bp clips over future meetings looks more likely than not, in our opinion. The RBNZ next meets on 27 November before it gets together again on 19 February 2025. We believe the contrasting fortunes between Australia and NZ and diverging RBA and RBNZ policy impulses points to a further reversal higher in AUD/NZD. We see AUD/NZD edging up towards ~1.15 by Q1 2025. For more see Market Musings: AUD/NZD: RBNZ delivers.

In terms of AUD/USD, as discussed above, over the near-term, geopolitical developments in the Middle East, policy announcements in China, and the US CPI data (tonight 11:30pm AEDT) will be in the driver’s seat. Signs inflation pressures in the US are continuing to moderate might see the USD, and in turn the AUD, level off. Indeed, as mentioned above, given US interest rate expectations are now quite like the US Fed’s ‘dot plot’ forecasts, barring significant upside surprises in the US data and/or a sharp deterioration in risk sentiment, we believe further USD upside (AUD downside) may be limited. With the RBA set to lag its counterparts in terms of when it starts and how far it goes during the next easing cycle, interest rate differentials should widen in Australia’s favour. We believe this, coupled with a revival in China’s economy, could see see the AUD recoup lost ground over coming months.

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