sign up log in
Want to go ad-free? Find out how, here.

US CPI data matched expectations clearing the way for a 25bp rate cut by the Fed next week. Canada cut rates by -50 bps. NZD hit on talk about China yuan policy

Currencies / analysis
US CPI data matched expectations clearing the way for a 25bp rate cut by the Fed next week. Canada cut rates by -50 bps. NZD hit on talk about China yuan policy

US equities advanced with CPI data matching expectations, which clears the way for a likely 25bp rate cut, by the Federal Reserve at the FOMC next week. The S&P gained 0.9% and the Nasdaq reached a fresh record high. Treasury yields oscillated in the period surrounding the CPI release but are little changed while the US dollar gained. The NZD fell sharply in early European trade, in line with other Asian currencies, after reports of a change in China’s currency policy but has since recovered.

US CPI rose by 0.3% for the third consecutive month in November taking the annual rate to 2.7%. The monthly core reading also increased 0.3% with the annual rate unchanged from October at 3.3%. The data was in line with consensus forecasts. Provisional estimates, which will be updated using inputs from the PPI release, suggest the core PCE deflator will increase 0.2% in November taking the annual rate to 2.9%.

The CPI data is the final first-tier input ahead of the December FOMC next week. A 25bp cut is now fully discounted with the market implied probability firming after the CPI report. Although the Fed is expected to make its third consecutive 25bp cut to interest rates, the trajectory next year is less certain as the disinflation process has stalled and economic activity remains resilient.

US treasury yields drifted higher into the CPI data and there was a knee-jerk move lower immediately afterwards. After the initial period of volatility, 2-year yields have settled modestly lower, while 10-year yields are little changed at 4.24%. There market looks ahead to the US$39 billion of 10-year supply this morning.

The Bank of Canada (BOC) cut rates by 50bp to 3.25% taking the cumulative easing since the cycle began in June to 150bp. The Bank signalled that further cuts aren’t guaranteed, and policy makers would assess ‘the need for further reductions in the policy rate ‘one decision at a time’ with guidance from incoming data. The market is pricing a slower pace of easing in 2025 with the implied terminal rate near 2.65%.

The Canadian dollar was the best performing G10 currency and gained as the BOC signalled greater caution ahead. The yen weakened after a Bloomberg report said that Bank of Japan officials see little cost to waiting to tighten policy ahead of its meeting next week.

Asian currencies including the NZD and AUD slumped in early European trade after it was reported that Chinese authorities are considering allowing the yuan to weaken next year to counter higher tariffs. The offshore yuan dropped almost 0.5% against the US dollar sending NZD/USD to fresh 2024 lows below 0.5770. The NZD has subsequently recovered and is little changed on the major crosses except NZD/JPY which is higher.

After the release of manufacturing and service sector data yesterday, we forecast the NZ economy contracted by 0.4% in Q3. This is weaker than the RBNZ’s projection for a 0.2% contraction which was contained in the Bank’s November Monetary Policy Statement. Q3 GDP data is released next Thursday.

NZ fixed income yields opened lower in the local session yesterday reflecting the post-RBA (and domestic close) rally in Australian rates. NZ swap rates retraced off the session lows but still ended the day lower in yield. 2-year swaps yields dropped 3bp to 3.37% with more muted declines further out the curve.

10-year government bonds closed unchanged at 4.33% after the initial rally faded. There were modest declines in yield for shorter maturities. NZDM will offer NZ$500 million of nominal NZGBs today in the final tender of the calendar year. The split is May-28 ($250m), May-35 ($225m) and Apr-37 ($25m). Tenders will restart in the second half of January and the schedule will be published on 18 December.

Turning to the day ahead, NZ electronic card transactions are released for the month of November. Labour market data is released in Australia with the consensus expecting the unemployment rate to edge higher to 4.2%. Weaker than expected Q3 GDP data and a change in RBA tone have brought forward easing expectations. There is a 70% chance priced for 25bp cut in February, up from 30% at the beginning of December.

The ECB is expected cut rates by 25bp, taking its deposit rate to 3.0%. This is fully discounted by market pricing. Updated ECB forecasts are likely to reflect a softer inflation and growth profile. US PPI data will allow analysts to fine tune forecasts for the PCE measure of inflation released later in the month. Initial jobless claims are expected to remain steady.

Daily exchange rates

Select chart tabs

Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.