Market Update 18/12/2024

■ The Australian dollar experienced further modest depreciation overnight, reaching a new annual low of 0.6332 against the US dollar. The AUD/USD pair has declined by 5 cents this quarter. Attention is focused on tomorrow’s Federal Open Market Committee (FOMC) meeting, scheduled for 6 am Sydney time, where a 25 basis point rate reduction is anticipated. The impact on the US dollar will largely depend on post-meeting communications, particularly Chair Powell’s press conference.

■ The US dollar showed mixed performance against major currencies overnight. November’s US retail sales data revealed robust growth, primarily driven by a 2.6% month-on-month increase in automotive purchases. However, industrial production contracted for the seventh time this year, with capacity utilization continuing its multi-year downward trend.

■ The AUD/GBP exchange rate fell below 0.5000 as UK two-year yields increased significantly. UK labor market data exceeded expectations, showing substantial employment growth, sustained low unemployment, and accelerated earnings growth. Market expectations indicate no rate reduction from the Bank of England (BoE) tomorrow, with only 50 basis points of cuts projected for 2025. Persistently high core CPI and services CPI are likely to support a more cautious rate reduction cycle by the BoE, potentially maintaining downward pressure on the AUD/GBP pair.

■ The AUD/CNH rate experienced a slight decline, falling below 4.62. Reuters reported yesterday that Chinese leadership has agreed to increase the budget deficit from 3% of GDP in 2024 to a record 4% of GDP in 2025. This proposed deficit would be the largest on record. Given potential challenges to Chinese exports from US tariffs, this more expansionary fiscal policy may enhance the likelihood of maintaining economic growth at approximately 5%.