Central banks in the UK, Norway and Eurozone tightened policy stances, which helped weaken the US dollar. The ECB left rates unchanged as was widely expected - the main refinancing rate at 0%, and the deposit rate at -0.5%. It also confirmed PEPP will run at a moderately lower pace than Q3 and net buying will be completed in March, but it is extending reinvestment to at least the end of 2024. It also said PEPP purchases could be resumed if necessary. APP monthly purchases were raised to EUR40bn from 20bn in Q2, but will slow it to 30bn in Q3, and will revert back to 20bn in Q4, and then run "as long as necessary." Economic forecasts were upgraded, particularly for the labour market, and inflation was seen as rising to 3.2% in 2022. The S&P500 is down 0.5%, while US bond yields fell in divergence with European yields. The US dollar index is down 0.5% on the day. EUR rose from 1.1285 to 1.1360. GBP rose from 1.3250 to 1.3374. USD/JPY fell from 114.20 to 113.56. AUD rose from 0.7160 to 0.7224. NZD rose from 0.6760 to 0.6834. AUD/NZD ranged between 1.0550 and 1.0580.
US 2yr treasury yields fell from 0.66% to 0.62%, while the 10yr yield fell from 1.46% to 1.42%. Markets fully price the first Fed funds rate hike to be in May 2022. German 10yr yields rose from -0.37% to -0.34% via -0.31% following the ECB, and UK 10yr yields rose from 0.73% to 0.76% via 0.83% following the BoE. Australian 3yr government bond yields (futures) ranged between 1.24% and 1.28%, while the 10yr yield ranged between 1.62% and 1.70%. Markets fully price the first RBA rate hike to be in July 2022.
Commodities, Brent crude oil futures rose 1.8% to $75, copper rose 2.9%, gold rose 1.8%, and iron ore rose 4.6% to $114.
Overnight Currency Range
AUD/USD 0.7146 0.7224
EUR/USD 1.1282 1.1360
GBP/USD 1.3243 1.3375
USD/JPY 113.56 114.25
NZD/USD 0.6758 0.6833
USD/CAD 1.2763 1.2857
USD/CNH 6.3715 6.3802
AUD/JPY 81.48 82.43
A quiet day ahead to round out the week with the BoJ rate decision expected to come and go with little fanfare. Elsewhere, UK retail sales, German IFO and EU CPI will be watched but are unlikely to be market moving. The AUD/USD bounced out of yesterday’s low of .7146 to peak at 0.7224 overnight. Demand is expected at .71c and again ahead of 0.6995 while offering interest remains thick above the overnight high.
Event Risk Data Today
NZ: ANZ’s December confidence surveys will provide insight into the effects of the ‘traffic light system’ and the easing of restrictions. Business confidence is expected to hold firm, while the recent fall in consumer confidence should slow.
Eur/UK: The final estimate of November’s CPI should continue to reflect the substantial impact of energy on Euro Area inflation (market f/c: 4.9%yr). The December IFO business climate survey is also expected to report a slip in German business confidence given the sharp rise in Covid-19 cases (market f/c: 95.3). Inflation concerns and Covid-19 fears are also expected to weigh on UK consumer sentiment in the December GfK survey (market f/c: -17). UK retail sales should meanwhile report modest growth in November, although new restrictions are a risk (market f/c: 0.8%).