Fresh Nine-year Best for New Zealand Dollar Buyers

Pre-Market U.S. Stock Movers

Source: Barchart

Weaker starting point implies a more pressing case to ultimately cut further

Recent months have seen accumulating evidence that the economy has started to turn the corner, with the significant cuts to the OCR made by the RBNZ since August supporting consumption, investment and the housing market. Yesterday’s ANZ Business Outlook survey provided further evidence of that turnaround, as did earlier data this week on the service sector PMI and our own consumer confidence survey. Forward indicators of housing market activity also look more encouraging.

However, yesterday’s GDP data tell us that this recovery is following a much steeper downturn in the middle quarters of this year. The cumulative 2.1% fall in GDP over the June and September quarters were much more than had been thought – indeed, outside of Covid, the steepest two-quarter downturn since 1991 – and tell us that past interest rate increases were biting harder into the economy than generally appreciated.

A full analysis of the GDP data will be released later yesterday. However, our initial read of this data strongly suggests the RBNZ will be even more confident that more interest rate cuts will be required after February 2025. GDP growth was revised higher in 2022 and 2023, implying stronger productivity growth over that period than estimated previously. Even so, the weaker than expected growth in mid-2024 means that the economy is likely to be starting from a position of greater excess capacity than the RBNZ previously thought. So even though yesterday’s data has no bearing on the recovery that we now believe to be underway, that recovery will take longer to remove the excess capacity now evident in the economy.

All else equal, that implies slightly less pressure on domestic inflation. Hence the RBNZ will likely be more confident that it can continue to ease policy and that the case for moving policy closer to a fully neutral setting is strengthened. The RBNZ’s view is that the neutral OCR is around 3% – this data will likely tell them they need to get there faster. Likely, they will want to be there by mid- 2025. All else equal we can see their revised forecasts in February reflecting that view.

Of course, all else may not be equal. The exchange rate is appropriately falling sharply and there are many unknowns in how the global environment, terms of trade and trade environment more generally will evolve.

But for now, it looks more likely that the OCR will trough a bit lower than previously thought. Following a 50bps rate cut at the 19 February meeting, we have pencilled in an extra 25bp cut in the April meeting to join the one already envisaged in May 2025. This will take the OCR to a trough of 3.25%.

Ahead of the RBNZ’s next meeting in February, there are several key pieces of domestic data that could be important for the RBNZ policy stance and our own forecast. That includes the Quarterly Survey of Business Opinion on 14 January, the CPI on 19 January and the Q4 labour market update on 5 February. Adjustments to the rates outlook in both directions are possible.

We have not revised our view of the neutral OCR – which remains at 3.75%. This means that the key consequence of this data is more stimulatory conditions by the end of 2025. That also lays the ground for an extra increase in the OCR later in 2026 to bring the OCR back to neutral levels. Hence, the view is starting to look a lot more like a normal interest rate cycle.

Our view remains that the mix of financial conditions is likely to tilt towards more easing being delivered in the form of a weaker exchange rate. Yesterday’s FOMC meeting seemed to solidify the view that US interest rates will remain higher than seen pre-Covid, even as New Zealand short rates head down. We will reevaluate our exchange rate forecasts in the New Year once a bit more data becomes available. Fair to say though, downside risks to our published NZD/USD and Trade Weighted Index forecasts exist.

The euro slid 1.33% against the dollar to $1.03518, its weakest level since November 2022, while the dollar index (DXY) surged 1.22% to 108.265, a two-year peak.

Source: Euronews

Energy – EIA reports smaller than expected inventory draws

Crude oil edged lower this morning as the dollar surged to its highest level in more than two years following expectations for fewer interest rate cuts from the Federal Reserve next year. Meanwhile, a lower-than-expected oil inventory withdrawal reported by the Energy Information Administration (EIA) is also keeping prices under pressure.

US weekly inventory numbers from the EIA yesterday showed that commercial crude oil inventories (excluding SPR) decreased by 0.9m barrels for the week ended on 13 December 2024, lower than market expectations of a decline of around 1.6m barrels. The draw was also smaller than the 4.7m barrel draw the API reported the previous day. When factoring in the SPR, the draw was even smaller, with total US crude oil inventories falling by just 0.4m barrels. Total US commercial crude oil stocks stand at 421m barrels, 6% below the five-year average.

Oil inventories at Cushing, Oklahoma rose 108k barrels to 23m barrels, after dropping to their lowest level since late September over the preceding week. Crude oil imports increased by 0.67m bbls/d last week to 6.65m bbls/d while exports strengthened by 1.8m bbls/d to 4.9m bbls/d (the highest since the end of July) over the reporting week.

In refined products, stocks of gasoline increased by 2.35m barrels, against a forecast for a build of 1.44m barrels. However, distillate fuel oil stockpiles fell by 3.2m barrels last week, in contrast to the market expectations of a build of 1m barrels. Meanwhile, refineries operated at 91.8% of their capacity, down from 92.4% seen in the previous week and the same period last year.

Metals – Gold tumbles on Fed outlook

Gold prices fell more than 2% to the lowest level in a month yesterday as the Fed forecasted slower monetary easing in 2025. In its final meeting for the year, the central bank lowered its interest rates by 25bp as expected. However, its quarterly forecasts for 2025 show 50bp of rate cuts for the year compared to previous estimates of 100bp of rate cuts. The US dollar index strengthened to the highest level since November 2022 while treasury yields also edged higher following the expectations of a slower pace of rate cuts next year.

LME copper was seen trading below US$8,950/t, and other industrial metals also edged lower this morning following the overall weakness in the broader financial markets. LME copper 3m prices settled at US$9,029/t yesterday, the lowest since the start of the month.

The latest data from the International Lead and Zinc Study Group (ILZSG) shows that the global zinc market recorded a marginal surplus of 19kt in the first 10 months of the year, lower than the surplus of 356kt during the same period last year. Global refined zinc production fell 1.7% year-on-year to 11.36mt, while total consumption reported gains of 1.3% YoY to 11.34mt between January and October 2024. As for lead, total production declined by 1.7% YoY to 10.78mt while consumption fell by 1.6% YoY to 10.76mt over the first ten months of the year. The global lead market witnessed a slight surplus of 21kt between January and October this year, compared to a surplus of 37kt during the same period last year.

Agriculture – US cocoa surges to fresh highs

US cocoa prices surged above US$12,000/t for the first time, while the price in London also edged higher yesterday on rising concerns of lower output in the Ivory Coast. Recent weather reports suggest that current dry conditions in West Africa are posing threats to cocoa trees and are expected to hamper output in February and March next year. There are no rainfalls expected in the region for the next 7-10 days and the Harmattan wind could worsen the production recovery. As per recent Bloomberg estimates, cocoa output in Ivory Coast is expected at 1.9mt in the 2024/25 season. This is lower than the government estimates of about 2.1mt-2.2mt near the start of the season in October. The expectation for a poor harvest comes at a time when inventories in the US exchange warehouses are at their lowest levels in more than two decades.

France’s Agriculture Ministry estimates the 2024/25 French soft wheat inventories at 2.87mt, higher than its previous estimates of 2.79mt. However, this is still 9.9% lower compared to the 2023/24 levels. Meanwhile, expectations for soft wheat exports in the 2024/25 season stand at 9.76mt (around 41% YoY), down from 9.89mt estimated earlier. As for corn, stockpile estimates were increased from 2.36mt to 2.68mt, while exports are seen at 4.67mt (vs. 4.76 estimated earlier) for the 2024/25 season.

The Pound Sterling (GBP) performs strongly against its major peers, except the Euro (EUR), ahead of the Bank of England’s (BoE) monetary policy decision, which will be announced at 12:00 GMT. The BoE is expected to leave interest rates unchanged at 4.75% with an 8-1 vote split. The Monetary Policy Committee (MPC) member who is expected to vote for a 25-basis points (bps) interest rate reduction is Swati Dhingra, who has been consistently supporting a more expansionary policy stance.

The BoE is almost certain to keep interest rates steady as inflationary pressures in the United Kingdom (UK) have accelerated in the last two months. The UK Consumer Price Index (CPI) data for November showed that annual headline inflation accelerated to 2.6%, as expected, from 2.3% in October. The core CPI—which excludes volatile items such as food, energy, alcohol, and tobacco—rose to 3.5% from the former reading of 3.3%.

Investors will pay close attention to BoE’s guidance on the policy outlook. "We think it's too early for the BoE to pre-commit to a sustained cutting cycle or to conclude that risks to inflation returning sustainably to the 2% target in the medium term have dissipated," analysts at Bank of America (BofA) said. 

According to market expectations, the BoE is expected to cut interest rates three times in 2025.

On the economic data front, investors will focus on the UK Retail Sales data for November, which will be released on Friday. Retail Sales, a key measure of consumer spending, are expected to rise by 0.5% on month after declining by 0.7% in October.

Daily digest market movers: Pound Sterling gains against USD, but broader outlook remains bearish

The Pound Sterling recovers to near 1.2660 against the US Dollar (USD) in Thursday’s London session after plunging to near 1.2560 on Wednesday. The GBP/USD pair rebounds as the US Dollar’s (USD) rally has paused after refreshing a two-year high. The US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, edges lower but holds the key support of 108.00.

The Greenback soared as the Federal Reserve (Fed) signaled fewer interest rate cuts for 2025 after cutting them by 25 bps to 4.25%-4.50%. The Fed’s dot plot showed that policymakers see Federal Fund rates heading to 3.9% in 2025, upwardly revising the projections from the 3.4% estimated in September.

Fed Chair Jerome Powell said at the press conference that economic strength gives the Fed the ability to approach rate cuts cautiously. When asked about the inflation outlook, Powell said he expects “inflation to continue to come down toward the 2% goal, on a 'sometimes bumpy' path”. Meanwhile, the Federal Open Market Committee (FOMC) has also raised core Personal Consumption Expenditure inflation (PCE) projections for 2025 to 2.5% from 2.2% in its latest economic projections.

Analysts at Monex Europe expect the Fed to hold interest rates at their current levels at least through the first half of 2025.

Technical Analysis: Pound Sterling recovers from 1.2550

The Pound Sterling recovers sharply after refreshing a three-week low near 1.2555 against the US Dollar on Thursday. The GBP/USD pair rebounds as the upward-sloping trendline, which is plotted from October 2023 low around 1.2035, remains a key support zone below 1.2600.

The 14-day Relative Strength Index (RSI) hovers near 40.00. A breakdown below the same could trigger a downside momentum.

A death cross, represented by the 50-day and 200-day Exponential Moving Averages (EMAs) near 1.2790, suggests a strong bearish trend in the long run.

Looking down, the pair is expected to find a cushion near the psychological support of 1.2500. On the upside, the 200-day EMA near 1.2815 will act as key resistance.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.