RBA makes a dovish pivot after recent softer data; market brings forward path of easier policy, driving down Australian rates and the AUD

The key market movement over the past 24 hours has been a whack to both the NZD and AUD following the RBA policy announcement yesterday afternoon. Surprising the market, the RBA made a dovish pivot, with Governor Bullock saying that the change in wording in the Statement was deliberate, following some softer data than expected and therefore “the Board is gaining some confidence that inflation is moving sustainably towards target”. The previous comment of not ruling anything in or out regarding policy was removed.

The message was clear and Australian rates and the AUD immediately fell after the announcement and the move has been sustained overnight. The market brought forward the path of easier policy, now seeing a better than even chance of a 25bps cut at the next meeting in February and two full cuts by May. Bullock was asked whether she was surprised by this market reaction and she said, “No I am not”.

The Australian 3-year rate is down 7bps and the 10-year rate is down 5bps since the RBA announcement, which coincided with the NZ close.  The AUD was already weakening into the announcement and fell further, and is now down 1.3% from this time yesterday to 0.6375.  The NZD followed the same path with a similar sized fall and traded at a fresh low for the year of 0.5792. A key support level is around 0.5800 so let’s see is that is broken on a sustained basis. The NZD currently trades just under that mark.  Both currencies have fully unwound the appreciation seen following China’s Politburo announcement we reported on yesterday. While NZD/AUD initially rose following the RBA announcement to as high as 0.9130, it has returned to the pre-RBA level just below 0.91.

The USD is broadly stronger, with the DXY index up 0.4%, the move limited by insignificant falls in CAD and GBP.  EUR and JPY have shown larger falls, with EUR having another quick peek below 1.05 before returning above the figure and USD/JPY up through 152.  Still, NZD crosses are much weaker, with NZD/CAD and NZD/GBP both down more than 1%, NZD/EUR down to 0.5515 and NZD/JPY down to 88.1.

There hasn’t been much else going in markets. In economic news, US small business optimism surged a monthly record of 8pts to 101.7, a 3½-year high, following the election of Trump as President – his policies of less regulation and tax cuts being seen as business-friendly. While the figure was much stronger than the consensus, with the post-election lift more than seen in 2016, the release had minimal impact on the market. As we’ve seen with other sentiment polls like those for the consumer, the outcome is more a political gauge than a leading indicator for the economy.

US equities are trading flat and the Euro Stoxx 600 index fell 0.5%.  Treasuries continue to consolidate and are up 3-4bps, with the 10-year rate at 4.24%.

In the domestic rates market, rates opened higher reflecting the previous night’s move in global markets before falling through the rest of the day to show only small net movements.  NZGB yields fell 1-2bps.  The 2-year swap rate was flat at 3.60% and the 10-year rate was up 2bps to 3.97%.  The fall in Australian rates since the NZ close will set the scene for the NZ open today.

Finally, bad news for coffee and chocolate lovers.  Coffee and cocoa prices have surged to fresh record highs.  Arabica coffee futures broke the previous record high set in 1977, with prices up 40% since October and nearly 100% for the year.  Weather conditions in Brazil, including an extended drought and high temperatures, have increased supply concerns. Bad weather in West Africa has affected cocoa supplies.

In the day ahead, NZ business activity data for Q3 will provide further useful input for GDP estimates, with indicators to date suggesting yet another contraction in the economy. US CPI data tonight are expected to show a fourth consecutive 0.3% print for the core measure, not great optics ahead of the widely expected Fed rate cut next week, although supporting the narrative of a pause in the easing cycle in early 2025.  An upward surprise would significantly reduce the chance of the Fed easing next week.  The Bank of Canada is widely expected to cut its policy rate by 50bps, with an outside chance of a smaller 25bps cut.