A galvanising week sends the Australian dollar to 0.69
The Australian dollar soared higher last week, following an emphatically strong Dec. labour market report which showed unemployment dropping to 4.1%, and the revamping of the dedollarisation narrative on account of geopolitics and tariff threats. Despite this elevated uncertainty, the Australian dollar outperformed its G10 peers over the week, gaining almost 2.5% against the USD and cementing its pole position on the G10 FX leaderboards. AUD/USD opens the week trading on the 0.69-handle. The week ahead is headlined by Australian Dec. quarter CPI and the FOMC. Markets will be glued to the newswires too, as geopolitical risks continue to simmer and as the US Administration lobs tariff threats on trade partners on a near daily basis.
A galvanising week sends the Australian dollar to 0.69
The Australian dollar soared higher last week, following an emphatically strong Dec. labour market report which showed unemployment dropping to 4.1%, and the revamping of the dedollarisation narrative on account of geopolitics and tariff threats. Despite this elevated uncertainty, the Australian dollar outperformed its G10 peers over the week, gaining almost 2.5% against the USD and cementing its pole position on the G10 FX leaderboards. AUD/USD opens the week trading on the 0.69-handle. The week ahead is headlined by Australian Dec. quarter CPI and the FOMC. Markets will be glued to the newswires too, as geopolitical risks continue to simmer and as the US Administration lobs tariff threats on trade partners on a near daily basis.
"Sell America" comes back in full swing
"Sell America" sentiment swept markets last week around Greenland's territorial integrity and associated tariff risks stealing the headlines. Trump later backed off, but not until the stability of US markets was threatened, with many commentators noting the EU's USD8trn in US asset holdings.
DXY's bearish price action extended into the end of the week, and on Monday morning hit 4-month lows near 97.00, speaking to an inherently unpredictable and chaotic US Administration which will continue to periodically shatter global trade, geopolitical and market norms in ways that mean the USD cannot trade sustainably higher. A second wave of broad USD sales developed into week's end, on reports that the BoJ and the Fed were checking FX prices.
US data was a very secondary consideration. US Nov Core PCE printed in line with expectations at 2.8% y/y, remaining above the Fed's long-run target of 2%. Softer US surveys including Uni. of Michigan sentiment and flash PMIs revealed that while sentiment and activity growth inched higher in Jan., consumers and businesses remain concerned about higher prices and political uncertainty.
AUD climbs on stronger employment data
The Australian dollar was already in a sweet spot in the new year, helped by base metals and a strengthening CNY. A surprisingly strong Dec jobs report added to AUD's lustre, triggering a rebuilding of Feb RBA rate hike expectations. The unemployment rate fell to 4.1% vs expectations of a 4.3%, and 65.2k jobs were added (vs exp 27k). In the days preceeding last week's jobs report, AUD/USD had already banked a US1+ cent gain. The jobs report then fuelled another leg higher to 0.68. RBA rate hike expectations firmed up to +14bp of hikes now priced for next week's meeting (from +7bp last week).
AUD was not content to sit idly by. On Thursday night and Friday, AUD/USD rallied further from around 0.68, ultimately finishing the week right on 0.69. More upside came through over the Australia day long weekend with AUD/USD exploring mid-0.69s.
AUD/NZD had a messier week, trading as low as 1.1525 around a strong NZ Q4 CPI and as high as 1.1670 into the back end of the week. AUD/NZD enjoyed an impressive run up from around 1.08 to 1.16 in the last 6 months. But now that the NZ economy is showing somes unmistakeable and compelling signs of rebounding, this cross is entering more of a consolidation phase.
AUD/JPY delivered a strong performance early last week, touching highs of 109.00 (not seen since Nov. 2024) amid a BoJ that continues to show a lack of urgency on rate hikes, and concerns around an LDP majority at the upcoming snap election (Feb 8) which would clear the path for expansionary fiscal policy. However, intervention threats saw JPY rally sharply into Friday's close, with AUD/JPY falling to around 106.00, finishing the week flat.
AUD/EUR is up 1.3% for the week trading just above 0.58, well supported by AUD's strong commodity backdrop and last week's jobs report.
UK unemployment remained at 5yr highs of 5.1% over the 3-months ending Nov, with retail and hospitality shedding the most jobs. Meanwhile, UK Dec CPI printed 0.1% hotter at 3.4% y/y, however the BoE anticipated this temporary rise and markets continue to expect BoE rate cuts this year with -36bp priced by December.
An important but less well-appreciated ongoing background AUD-positive is the persistent strength unfolding in the Yuan. The PBOC has been setting lower daily USD/CNY fixes for the better part of the last 6 months and caught markets off-guard late last week, setting the fix below the psychologically important 7.00 big figure for the first time since 2023. Beijing is clearly comfortable with ongoing Yuan gains.
Gold closes above $5000/oz
Gold and silver have seen massive surges in the last month, in line with elevated geopolitical uncertainty and the haven demand it creates; both metals reached fresh highs yesterday with gold touching $5100/oz and silver just shy of $120 yesterday, bringing YTD gains up to 17% and 53% respectively. As much as these moves are obviously tied to geopolitics, underlying sovereign physical bullion demand remains very robust. The National Bank of Poland has long been one of the biggest buyers and announced plans to purchase an additional 150t this year after purchasing 100t last year.
US equities opened last week with heavy price action, depressed by Trump's tariff threats against the EU, however bounced back to finish the week flat following Trump's comments backtracking immediate threats against Greenland and Europe. The S&P500 posted a 0.5% gain over the last 5 days. US 10-year yield largely tracked slightly lower over the week.
JGB yields however were a different story. Fiscal risks remain front and center as populist election pledges in Japan confront the cold hard discipline of bond markets that are wary about fiscal sustainability. 40yr JGB yields hit 4% for the first time since their debut in 2007, but strong pledges to backstop the market helped stabilise the market. FX markets are also wary about intervention to support the weak JPY. The intriguing twist last week is that the US Fed was reportedly checking prices as an agent for BoJ/MoF.
The week ahead…
Local calendars are headlined by domestic Q4 CPI (Wed) this week with markets forecasting the trimmed measure to print at 3.3% y/y, and 0.9% q/q. Considering last week's upside labour market surprise, CPI will be closely watched as the final key print ahead of the Feb 3 RBA meeting. With +14bp of hikes now priced, a hotter CPI result likely tips the scale further towards a hike in February given Q3 trimmed CPI also printed hotter at 1.0% (vs exp 0.8%).
The FOMC will also be meeting this week (Wed), with markets widely expecting US rates to remain on hold. However we remain watchful of any comments regarding the recent threats to Fed independence or hints around the next Fed Chair nominee. For the longest of time, Kevin Hassett was considered the frontrunner, but in the last week or two, markets have warmed to Kevin Warsh (previously a Fed Governor) and Rick Rieder (Private Sector Asset Management).
The deadline for the funding of several US government agencies also expires this week (Jan 30) with potential growing for another shutdown given that Democrats are reportedly unwilling to advance the six-bill spending package set for consideration if it includes "Department of Homeland Security" (DHS) funding.
Tariffs were obviously back in the headlines last week with Trump threatening tariffs on Europe around Greenland, on Canada if they sign a trade deal with China, and just this morning, on South Korea. Tensions with Iran continue to simmer too. Expect plenty of headlines to chew on, on the tariff and geopolitical front this week.
Tuesday
- US Jan Conf. Board Consumer Confidence, Richmond Fed Manf. Index
Wednesday
- Australia Dec CPI
- BoC Monetary Policy Meeting
- FOMC Monetary Policy Meeting
Thursday
- NZ Dec Trade Bal.
- US Nov Trade Bal, Durable Goods (Final), Factory Orders
Friday
- Australia Q4 PPI, Dec Private Sector Credit
- Japan Tokyo CPI
- Eurozone Dec Unemployment, Q4 GDP (Advance)
- ECB 1-yr & 3-yr CPI expectations.
- US Dec PPI
- Fedspeak; Musalem.
- Funding for parts of US gov. expires.
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