USD continues to strengthen ahead of ECB policy update

AUD: Strong labour market puts dampener on RBA rate cut expectations

The best performing G10 currency during the Asian trading session has been the Australian dollar following the release of the latest labour market report from Australia. It has resulted in AUD/USD rising back above the 0.6700-level after hitting a low yesterday at 0.6658. The Australian dollar has been supported by the release of the stronger than expected Australian labour market report for September which has put a dampener on market expectations for the RBA to begin cutting rates before the end of this year. The Australian rate market is now pricing in only around 7bps of RBA cuts by the December policy meeting with the expected timing of the first rate cut delayed until February or April of next year. The report revealed that the Australian economy added 64.1k jobs in September following a gain of 42.6k in August. It was the sixth month in a row that employment growth has surprised to the upside. Over the last six months employment growth has averaged 44.6k jobs/month compared to  27.9k jobs/month in the previous six-month period. The pick-up in employment growth has helped to offset the fast pace of growth in the labour force that has increased by annual rate of 3.6%. After moving gradually higher between Q4 2023 and Q1 2024, the unemployment rate has stabilized in recent quarters at just above 4.0%. The ongoing strength of the labour market will discourage the RBA from cutting rates more quickly in response to slowing inflation. The next important data release will be the latest CPI report for Q3 on 30^th October. A bigger than expected slowdown in inflation would be required to inject fresh life into market expectations for the RBA to cut rates before the end of this year. The monthly CPI reports have already revealed that inflation continues to slow falling to an annual rate of 2.7% in August from 3.5% in July. The slowdown in inflation back towards the RBA’s target is creating room for the RBA to begin lowering rates.

The other main development for the Australian dollar overnight was another policy briefing by Chinese officials this time focused on the housing market. The steps announced to address weakness in the housing market fell short of market expectations. Officials pledged to nearly double the loan quota for unfinished residential projects to CNY4 trillion in an attempt to ensure home completion of so-called “white list” property projects. The “white list” program is part of a plan to ensure unfinished homes are delivered to buyers. According to Bloomberg there are around 48 million units of sold but unbuilt homes. China is also weighing up whether to allow banks to issue loans to buy idle land, and increase affordable housing support for families with two children or more. The government will also renovate 1 million homes in older, rundown dwellings in large cities. Overall, the package of measures is not judged as sufficient to turnaround weakness in the housing market. The recent  scaling back of optimism over the effectiveness of China stimulus measures to boost growth has weighed on the Australian dollar alongside the rising probability of Donald Trump winning the election and starting a second trade war with China. According to PolyMarket, the probability of Trump winning the election has risen up to 58%.     

YIELD SPREADS HAVE BEEN MOVING BACK IN FAVOUR OF USD

Source: Bloomberg, Macrobond & MUFG GMR

EUR: ECB set to step up pace of easing after faster slowdown in inflation 

The euro has continued to weaken against the US dollar breaking back below support from the 200-day moving average at around 1.0870 ahead of today’s ECB policy meeting. As highlighted above the US dollar is continuing to rebound encouraged by the rising probability of Donald Trump winning the US election. The recent move lower in EUR/USD is supported by yield differentials which have moved back in favour of a stronger US dollar. While the US rate market has moved to scale back expectations for more aggressive Fed easing, the euro-zone rate market has priced in a faster pace of ECB rate cuts. We expect the ECB to step up the pace of easing today by delivering the first back-to-back 25bps rate cut after previously cutting rates in June and September. The bigger than expected slowdown for inflation in the euro-zone in September which fell back below the ECB’s target to 1.8% has given the green light for the ECB to bring forward plans for another rate cut. At the same time, ECB policymakers have expressed more concern over the loss of growth momentum heading into year end with Germany’s economy still stagnating.

We expect the ECB to leave the door open to another rate cut at the final policy meeting of this year in December. An outcome which is already fully priced in the euro-zone rate market with 25bps rate cuts now expected to be delivered at every upcoming policy meeting until April and the policy rate expected to fall back to or just below 2.00% next year. It provides a high hurdle for a dovish policy surprise from the ECB today. President Lagarde would have to indicate that the ECB is considering larger 50bps cuts to trigger a bigger sell-off for the euro. An outcome that we still think is unlikely at the current juncture. Bank of France Governor Villeroy recently downplayed the likelihood of the ECB following the Fed by delivering larger 50bps cuts and prefers to stick to their “habit of acting gradually”.                   

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	CPI (YoY)	Sep	1.8%	2.2%	!!!
EC	10:00	Trade Balance	Aug	17.8B	21.2B	!!
EC	11:00	EU Leaders Summit	--	--	--	!!
EC	13:15	Deposit Facility Rate	Oct	3.25%	3.50%	!!!
US	13:30	Core Retail Sales (MoM)	Sep	0.1%	0.1%	!!!
US	13:30	Initial Jobless Claims	--	241K	258K	!!!
EC	13:45	ECB Press Conference	--	--	--	!!!
US	14:15	Industrial Production (MoM)	Sep	-0.1%	0.8%	!!
US	15:00	NAHB Housing Market Index	Oct	43	41	!
EC	15:15	ECB President Lagarde Speaks	--	--	--	!!

Source: Bloomberg