Dollar rally on pause ahead of Trump inauguration
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AUD
We saw a broad outperformance in the Australian dollar last week following the release of yet another impressive jobs report out of the Australian economy. A further 56.3k net jobs were added in the final month of 2024, the most since September and almost four times the 15k estimate. The unemployment rate edged up slightly, although this was already fully priced in by markets. A caveat to the data is that the entirety of the hiring boom was fuelled by a surge in part-time employment, with the number of full-time jobs actually falling in December.
Perhaps in recognition of the latter, swap markets are continuing to point towards a first rate cut in the current cycle from the RBA at its next meeting in February, which is currently roughly 65% priced in by markets. At any rate, we would expect any easing cycle to be shallow this year, particularly were upcoming jobs reports to continue to show robust levels of job creation.
NZD
The New Zealand dollar slightly lagged behind its Australian counterpart last week. The December PMI data from Business NZ was underwhelming again, showing that activity remains deep in contraction (45.9). This will not dissuade RBNZ officials from continuing to vote in favour of further rate reductions in the coming months, and swaps continue to see a 50 basis point cut at the February meeting as more likely than not.
This week could be an important one for the New Zealand currency. The fourth quarter inflation data will be released on Tuesday, with economists eyeing a modest easing in inflationary pressures from Q3. Attention will also be on Trump’s inauguration, particularly any remarks on tariffs towards China – New Zealand’s main trading partner.
USD
Inflation data brought welcome relief to the Federal Reserve last week. Our favourite indicator, the annualized three-month average in the core index, fell noticeably, from 3.7% to 3.3%, and printed below 0.3% in the monthly number for the first time in five months. Markets are now pricing in one and a half 25 bp Fed cuts in 2025 and a terminal rate of about 4%, and the 10 year Treasury rate fell back for the first time this year stopping the dollar rally for now, and boosting risk assets worldwide. In this holiday-shortened week, we will focus primarily on news and hints emanating from Trump’s economic team, primarily about prospects for tariffs, but also fiscal policy and the administration attitude towards the Federal Reserve
CNY
A weaker US dollar and positive domestic newsflow have helped the yuan to end the week with small gains. It started with optimistic trade news and closed with a GDP report showing more robust economic activity than thought in Q4, which allowed the full-year GDP to expand by 5%, in line with the official target. While authorities’ stimulative efforts towards the end of the year seem to have borne fruit, it is uncertain whether the momentum will be sustained, particularly given a substantial overrepresentation of exports set to fall victim to Trump’s tariffs.
The domestic economic calendar is largely empty a week before China’s Lunar New Year celebrations. The main highlight was setting the loan prime rates earlier today, which have been left unchanged, as expected.
JPY
The yen has been the best performer in the G10 so far in 2025, as markets brace for another interest rate hike from the Bank of Japan at its January meeting later in the week. Recent economic news and communications from BoJ officials, particularly governor Ueda, suggest that another rate increase at Friday’s policy meeting is far more likely than not. Swaps currently see a little more than an 80% chance of a 25 basis point hike, so another month of inaction would be a major disappointment for investors and would almost certainly trigger a sharp move lower in the yen across the board.
We do not think that policymakers will want to disappoint investors again, particularly given their wariness over the impact of a weaker currency on inflation. We instead expect the BoJ to follow through with a hike, while delivering a non-committal set of accompanying communications that fails to provide any guarantees on the timing of any subsequent policy adjustments. This would likely still be enough to buoy the yen, which remains one of our favoured G10 currencies in 2025.