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AUD/USD regained some composure last week, finding a base around 0.6700. Markets are much less certain about the prospect of ongoing Fed rate cuts, but the policy news coming out of Beijing remains reassuring.

Aussie regains composure

 

October has been a more challenging month for AUD/USD. Despite an ongoing much improved tone around China, helping support AUD-crosses, AUD/USD has been resetting lower amid a revival of the US "resiliency” theme and related to that, a hawkish repricing to Fed rate cut expectations.

 

 

But AUD/USD regained some composure last week. The pair is still down on levels compared to a week ago, by around -0.80%, but it found a base around 0.6700 mid-last week and is staging a mild rebound in the last couple days.

 

 

Markets are much less certain about the prospect of ongoing Fed rate cuts. US Sept CPI last week came in above consensus expectations, the core rate rising 0.3% in the month vs expectations for a 0.2% gain. When combined with recent hefty upward revisions to US GDP in the last several years and a much stronger than expected Sept. US jobs report, a picture of US “resiliency revived” has formed.

 

 

The net impact has seen markets walk back Fed rate cut bets, with end-2025 expectations for fed funds rising from around 2.80-2.90% to 3.35% (fed funds is currently 4.875%). A good sized Fed rate cut cycle is still priced in, but the risks have shifted away from a full blown outsized rate cut cycle, to something more akin to measured and calibrated rate cut path, not too dissimilar from the Fed’s own dot plot projections.

 

 

At the same time, the ECB, the BoE, the RBNZ and the BoJ have all been pivoting dovishly.

 

 

The ECB is expected to cut their policy rate 25bp this week, following benign Eurozone wages and inflation data. BoE Governor Bailey recently hinted that there is room for the BoE to be more aggressive. The RBNZ delivered an outsized 50bp rate cut last week and crucially, they did not push back against aggressive pricing for more cuts in the year ahead. Lastly, expectations for more policy BoJ normalisation steps have eased, amid “jawboning” from new PM Ishiba and a more cautious sounding BoJ Governor Ueda.

 

 

The upshot is that the USD has regained lost ground against a wide range of currencies: EUR/USD has fallen from 1.1200 in late September to 1.0930, GBP/USD has slipped from its perch above 1.3400+ to the 1.3000-1.3100 area, NZD/USD has tumbled from the mid-0.6300s to below 0.6100, while USD/JPY has risen from around 142.00 to 149.00+.

 

 

AUD/USD has not been able to resist the broadly firmer USD, but it is finding support around 0.6700.

 

 

The policy news coming out of Beijing remains reassuring. China’s Finance Ministry gave a highly anticipated policy press briefing on the weekend. The bar for a big positive surprise was impossibly high. Fresh fiscal spending measures were never really on the cards without a prior meeting and approval by the Standing Committee of the NPC to lift China’s central budget deficit target. In the event, officials offered a reassuring message that Beijing has “relatively big room” to raise debt and deficits, meaning that a Standing Committee meeting later this month (no date yet) will become a highly anticipated market event.

 

 

For now, officials are focussed on crafting new fiscal support measures within existing resources, by tapping budgeted unused fiscal capacity and bringing forward bond issuance quotas. Within that framework, Finance Ministry officials announced several newsworthy steps.

 

Plans are afoot for a large debt swap plan to alleviate the dire state of local government finances. Additional capacity to clear unsold housing inventory is also in the works, by allowing local governments to issue bonds to purchase unsold homes.

 

 

Offshore commentators seemed underwhelmed by these steps, but local China markets continue to embrace a more positive perspective, sending China stocks higher still after the announcement.

 

 

For the week ahead, we will be watching Australia’s Sept. jobs report on Thursday, following five consecutive solid gains that have seen a total 205k+ jobs created.

 

 

On Friday China will be releasing Sept. monthly activity data covering industrial production, retail sales and fixed asset investment and most importantly Q3 GDP. Keep an eye on the ECB, where another rate cut is fully discounted for Thursday, US retail sales for September and Q3 NZ CPI too.

 

Tuesday

-

Wednesday

-NZ Q3 CPI

-Australia assistant RBA Governor Hunter speaks

-UK Sept. CPI

Thursday

-Australia Sept. employment

-ECB monetary policy meeting

-US Sept. retail sales  

Friday

-Japan Sept. CPI

-China, Q3 GDP & Sept. industrial production, retail sales and fixed investment

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