FX Update: JPY and NZD at the extremes of policy trajectories

AUDNZD is teasing the top of the range ahead of next Wednesday’s RBNZ meeting. The contrasting monetary policy trajectories of the two countries would seemingly have sent the pair well on its way to 1.1500 a long time ago. The 2-year yield spread between the two currencies is at its highest since early 2012, when the pair was trading closer to 1.3000. The RBA is resolute in sticking at the top of its rate hike cycle until it sees more persistent evidence of inflation receding, while the RBNZ has been a leader in cutting rates and might be set to accelerate its cutting pace to 75 basis points at next Wednesday’s meeting. If one removes the pandemic-related brief unemployment rate spike in New Zealand, the rate hits its highest in Q3 since 2017, at 4.8% vs. the cycle low of 3.2% in 2022. But the AUD side of the equation has been held back from more powerful upside by concerns that China is unwilling to pull out the big stimulus bazooka and on the threat to China from Trump tariffs.

Top highlights in the coming week’s event risks: (times are GMT where shown):
Note: next week is Thanksgiving week in the USA, with many traveling on Wednesday and taking off both Thursday and Friday in any case, even if markets are only fully closed on Thursday itself.

Also note that the list may not be complete and please consult our daily Quick Take for a more complete run-down day to day of incoming event risks.

• Japan  (Fri 2330). To the degree that it is possible for Bank of Japan intentions at the December meeting to move the market, this could establish the direction for JPY for now, barring any significant moves in US treasuries in either direction, which seem to dominate JPY direction even in crosses where that doesn’t deserve to be the case. (For example in EURJPY – the ECB is cutting, the BoJ is hiking – shouldn’t EURJPY take more note than it has?). JPY moves have been treacherous this week with geopolitics creating “false” impulses.
• Preliminary Nov. France, Germany and Eurozone PMI (Fri 0815-0900). These get more play than the other preliminary PMI’s out the same day.
• Germany Nov. IFO (Mon 0900) As with the ZEW survey, this survey is in historically bad territory, if not as near the pandemic and 2009 nadir – a new way forward can’t come quickly enough for Germany. Energy prices could risk aggravating the misery this winter if Europe isn’t blessed with a third winter in a row of mild temperatures.
• US Nov. Consumer Confidence (Tue 1500) – an odd surge in confidence last month that may have been on pro-Trump respondents expressing enthusiasm. Could take another few months or more to have a “cleaner” reading, though the market long ago lost interest in this survey.
• US 5-year Treasury auction (1800) All treasury related activity worth watching as long as US yields are elevated. This follows Monday’s 2-year auction and a 7-year auction on Wednesday.
• FOMC Minutes (Tue 1900) Worth watching for the quality of the debate within the Fed, but Powell and company are very much looking at incoming data – and Trump administration policy will only impact beyond Jan 20.
• Australia Oct. CPI (Wed 0030) Given RBA unwillingness to kick off rate cut cycle, the sensitive side of the data would be on a downside surprise.
• RBNZ Official Cash Rate (Wed 0100) – the market looking for at least 50 basis point here and they could even cut 75. NZD picking up this risk it appears and the latter could see AUDNZD challenging the last local resistance of 2024 near 1.1150. NZDJPY also intriguing if US treasury yields are pushing lower.
• US Weekly Initial Jobless Claims (Wed 1330) These have been so incredibly low for so long save for a few minor surges that bears on the US economy have given up on this indicator.
• US Oct. PCE Inflation (Wed 1500) A minor or even slightly more major input into the December rate decision if it is higher than expected – labor market data more important.
• Germany Nov. Flash CPI (Thu 1300) – energy prices a forward risk, but inflation levels have been muted in Germany, though they slowed their descent already in the spring.
• Japan Tokyo Nov. CPI (Thu 2350) – Market may be touchy on any inflation data out of Japan.
• France Nov. Flash CPI (Fri 0745) – Inflation has continued slowing in France, at 1.2% YoY in Oct.
• Germany Nov. Unemployment Rate (Fri 0855) – the rate is rising toward the pandemic highs, hitting 6.1% in Oct.
• Eurozone Nov. Flash CPI estimate (1000) – core inflation on a Eurozone-wide basis has only descended to 2.7% as o October, a level it first hit back in April. If the Euro remains weak and begins to threaten parity in the US dollar, the ECB may have no choice but to wax more cautious on the cutting path from here.

Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 4 is strong and above 6 very strong.

The US dollar trend still running hot as the consolidation in most places has been quite shallow. Note the very weak Swedish krone – exposed to a weak Europe and a dovish Riksbank.

Table: FX Board Trend Scoreboard for individual pairs.
JPY volatility was a bit hotter again this week after the volatility on geopolitics and BoJ comments on the currency. EURGBP can’t decide if it wants to reverse back higher or stay in the low range. EURJPY flipped to a negative trend four days ago but hasn’t followed through and lurched into a proper down-trend yet.