10th December 2021 - Markets await US CPI and take note of the RBA/Fed divergence

Market Headlines

The market’s mood remained sour, amid Omicron uncertainty and as top central banks’ decisions loom. The ECB and the US Federal Reserve will announce their decisions on monetary policy next week. The Fed is seen speeding up tapering, moving in the opposite direction from the ECB. The S&P500 is currently down 0.2%, bond yields are lower, and the defensive US dollar is higher.

The US dollar index is up 0.4% on the day. EUR fell from 1.1330 to 1.1279. USD/JPY fell from 113.75 to 113.27, the safe-haven yen outperforming. AUD fell from 0.7187 to 0.7136. NZD fell from 0.6823 to 0.6781. AUD/NZD ranged sideways between 1.0513 and 1.0538.

Commodities, Brent crude oil futures fell 1.1% to $75, copper fell 1.4%, gold fell 0.4%, and iron ore fell 3.6% to $106.

Overnight Currency Range

AUD/USD 0.7136 0.7187

EUR/USD 1.1279 1.1348

GBP/USD 1.3172 1.3219

USD/JPY 113.27 113.82

NZD/USD 0.6782 0.6823

USD/CAD 1.2648 1.2716

USD/CNH 6.3396 6.384

AUD/JPY 80.89 81.66

AUD/NZD 1.0513 1.0535

AUD Thoughts

At 0.7150, AUD/USD is lower by some 0.25% on the day and sat between a range of 0.7186 and 0.7135. The greenback continues to recover within a wider consolidative phase ahead of Friday's Consumer Price Index and next week's Federal Reserve meeting.

The central bank divergence between the Fed and Reserve bank of Australia has undermined the Aussie of late due to the dovish tones of the RBA. Beyond the Fed, attention is already turning to the RBA February policy meeting. The Bank has made it clear that it will be considering its QE programme in the new year and speculation is already mounting that an end to the programme could be a favoured outcome for the Bank. A better tone in risk appetite more generally has allowed AUD/USD to pull back some ground.

US CPI eyed…Looking ahead for the week, the US Consumer Price index will be key. Analysts expect inflation to slow significantly as fiscal stimulus fades and supply constraints ease, but we don't expect the data to be validated in the near term. The CPI likely surged in Nov, with a drop in oil coming too late to avert another large gain in gasoline and core prices boosted by rapidly rising used vehicle prices and post-Delta strengthening in airfares and lodging.

Meanwhile, in the third quarter, Australian underlying CPI inflation has registered 2.1% YoY and at the bottom of the RBA’s 2% to 3% target and below the average of the past 30 years. This clearly contrasts with some of the high inflation prints for other G10 economies especially that of the US which is likely to help AUD/USD remain underpinned should the US CPI come in hot.

AUD/USD traded in a relatively tight 0.7136/0.7187. Demand remains ahead of the recent lows of 0.6995 while offering interest is expected to emerge on a 0.7200 handle.

Event Risk Data Today

NZ: The November manufacturing PMI should report a lift due to the easing of restrictions and related demand boost. November card spending is also expected to post substantial gains on reopening and Black Friday sales, albeit partly offset by Auckland’s restrictions (f/c: 5.0%).

Germany: The final release of November’s CPI will confirm energy’s significant contribution.

UK: The trade deficit is expected to narrow slightly in November, but significant uncertainty remains given Brexit and COVID-19 (market f/c: -£2424mn).

US: Another substantial lift in consumer prices is anticipated in November as robust demand broadens the scope of inflation beyond the categories first associated with reopening (market f/c: 0.7%m/m, 6.8%y/y). The December University of Michigan sentiment survey should continue to signal weak confidence as high inflation reduces purchasing power (market f/c: 68.0).

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