Currencies
Dollar wavers as CPI eyed; Aussie, kiwi rise on China's policy
2024-12-09
In the complex world of global finance, the euro and the dollar find themselves in a state of skittish trading on Monday. Investors are on tenterhooks, awaiting crucial U.S. inflation data later this week. Meanwhile, the Australian and New Zealand dollars have seen a rally following China's pledge of an “appropriately loose” monetary policy next year.
Anticipating U.S. Inflation and Fed Rate Cuts
Markets have already priced in a quarter-point rate cut by the U.S. Federal Reserve next week as a near certainty. However, the real focus lies in the U.S. consumer price data due on Wednesday. Michael Brown, senior research strategist at Pepperstone, points out that the rise in unemployment seen in November further cements the case for a 25-basis point cut. “Unless we get a really hot inflation number, but that’s certainly not the base case,” he adds. The Fed is currently more focused on the labour market rather than developments with regards to inflation.Data from Friday showed that U.S. job growth surged in November, but the increase in the unemployment rate to 4.2% indicates an easing labour market. This should allow the Fed to cut interest rates again this month.The euro was flat against the dollar at $1.0566, having fallen earlier by as much as 0.3%. Meanwhile, the greenback gained 0.34% against the yen to 150.515. The dollar index remained flat at 105.96.Michael Brown expects the upcoming U.S. inflation data, the European Central Bank policy meeting on Thursday, and the Fed rate decision next week to lead to subdued trading in currencies for the time being due to the significant event risk on the horizon.Mizuho Bank strategist Vishnu Varathan also highlights a host of geopolitical developments, such as the weekend fall of Syrian President Bashar al-Assad, along with macro- and Trump-related trades. These factors provide markets with further impetus to remain long dollars. “There’s no incentive to short the dollar against any particular currency,” he says.The Impact of China's Monetary Policy Shift
The Australian dollar gained 0.84% against the greenback, and the kiwi rose 0.5% after China announced a shift in monetary policy to stimulate growth. China will adopt an “appropriately loose” monetary policy next year as part of measures to support economic growth. It will also implement a more proactive fiscal policy and step up “unconventional” counter-cyclical adjustments, as reported by state media on Monday citing a Politburo meeting.The central bank has outlined five policy stances – “loose”, “appropriately loose”, “prudent”, “appropriately tight” and “tight” – with flexibility on either side of each. After the 2008 global financial crisis, China adopted an “appropriately loose” monetary policy before switching to “prudent” in late 2010.The dollar rose 0.53% versus South Korea’s won. Over the weekend, South Korean President Yoon Suk Yeol survived an impeachment vote in parliament prompted by his short-lived attempt to impose martial law last week.Last week's headline, bitcoin, which hit six-figures for the first time at a record $103,649, was last at $98,282.Central Bank Meetings and Their Implications
This week, the main events investors are closely watching are the European Central Bank policy meeting on Thursday, where a quarter-point cut is expected. Additionally, China's closed-door Central Economic Work Conference is taking place.The Bank of Canada (BoC), the Swiss National Bank (SNB), and the Reserve Bank of Australia (RBA) are also meeting this week. Deep rate cuts are anticipated from the first two, which could further widen yield differentials against their currencies.The Canadian dollar traded near a 4-1/2-year low on Monday as markets anticipate another outsized interest-rate cut. The loonie pared some earlier losses, and the dollar was last down 0.21% against the currency.The RBA is the only central bank among its peers that has not yet begun cutting rates and is not expected to do so in December. However, it might soften its tone on growth targets.This week will be an interesting one for the Swiss franc given the intense debate about how deep the SNB's fourth rate cut of the cycle will be. Markets give a higher probability for a larger 50-basis point cut and are even anticipating negative interest rates by next year.