USD/INR Softens Ahead Of US Core PCE Release

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Sources：Bloomberg

(Dec 20): France’s debt agency kept its issuance plans for 2025 unchanged from an initial target as it awaits a new budget following the ouster of the government earlier this month.

Agence France Tresor, or AFT, said it will sell €300 billion ($312 billion) in government bonds next year, net of buybacks. That’s in line with the forecast in the original plan announced in October, following €285 billion of sales this year.

“If this amount has to be changed later in the year, we will do so and communicate to investors,” AFT Chief Executive Antoine Deruennes said.

France is in political and fiscal tumult after leftist and far-right lawmakers united to topple the government of Michel Barnier over his fiscal plans. The former prime minister planned to narrow the budget deficit to 5% of economic output in 2025 from 6.1% this year through €60 billion of tax increases and spending cuts.

President Emmanuel Macron last week appointed Francois Bayrou to succeed Barnier, but the new premier still has not picked a cabinet to attempt to pass a new budget. In the meantime, France will rely on emergency legislation from January that rolls over the same taxes as last year, allows the government to borrow money and issue spending decrees.

“The special law authorizes the AFT to continue to carry out all the cash and debt operations to ensure the financial continuity of the state,” Deruennes said.

While Bayrou has not detailed his policy priorities, his government may have to make concessions on taxation and expenditure that would swell the deficit to be financed by debt issuance. Moreover, France’s economic prospects have deteriorated sharply amid the political uncertainty, making financial objectives harder to reach.

The political and fiscal uncertainty has sent tremors through French debt markets since Macron called snap elections in June, as investors demanded higher compensation given doubts over the country’s ability to tackle its debt mountain.

The gap between French and German 10-year yields, a proxy for French bond risk, is trading around 81 basis points, nearly double where it was in the first half of the year. The gap hit a peak of 90 basis points in late November, the widest since 2012.

Source: Theedgemarkets

The People’s Bank of China (PBOC), China's central bank, announced to leave its Loan Prime Rates (LPRs) unchanged on Friday. The one-year and five-year LPRs were at 3.10% and 3.60%, respectively.   

Market reaction

At the time of writing, AUD/USD is holding lower ground near 0.6222, down 0.32% on the day.

Australian Dollar FAQs

What key factors drive the Australian Dollar?

One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.

How do the decisions of the Reserve Bank of Australia impact the Australian Dollar?

The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.

How does the health of the Chinese Economy impact the Australian Dollar?

China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.

How does the price of Iron Ore impact the Australian Dollar?

Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.

How does the Trade Balance impact the Australian Dollar?

The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.

Source: FXSTREET

TOKYO (Dec 20): Japan’s core inflation accelerated in November as rising food and fuel costs hit households, data showed on Friday, keeping the central bank under pressure to raise interest rates.

The data, which came in the wake of the Bank of Japan’s (BOJ) decision to maintain interest rates at 0.25% on Thursday, highlights broadening inflationary pressure that could prod the bank to raise borrowing costs further.

Renewed yen declines could pressure prices higher by pushing up import costs. The BOJ’s decision to stand pat and BOJ governor Kazuo Ueda’s dovish comments drove the dollar to a five-month high of 157.80 yen (RM4.50)7 on Friday.

The nationwide core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 2.7% in November from a year earlier, government data showed, roughly in line with a median market forecast for a 2.6% gain.

It accelerated from a 2.3% rise in October due partly to stubbornly high prices of rice and the phase-out of government subsidies to curb utility bills.

"November’s surge in inflation wasn’t a surprise," Capital Economics wrote in a research note. "The Bank of Japan will have known it was on the cards when it decided not to hike rates yesterday. But it should add to the bank’s confidence that it can resume rate hikes over the months ahead," it said.

A separate index that strips away the effects of volatile fresh food and fuel, scrutinised by the BOJ as a better gauge of demand-driven inflation, rose 2.4% in November from a year earlier after a 2.3% gain in October.

Service-sector inflation was steady at 1.5%, in a sign firms continued to pass on rising labour costs, the data showed.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, on the view that Japan was on the cusp of durably achieving its 2% inflation target.

It has stressed the BOJ’s readiness to raise rates again if Japan continues to make progress in durably achieving its price target, backed by domestic demand and sustained wage gains.

Ueda said on Thursday that the BOJ needed more information to hike rates again, stressing the need for clarity on next year’s wage growth and incoming US president Donald Trump’s economic policies.

"Given the (BOJ’s) assessment that import price rises are subsiding, it’s hard to expect the BOJ to hike rates in January," said Naoya Hasegawa, chief bond strategist at Okasan Securities, who projects a hike in March. "Most market players likely viewed Ueda’s news conference as quite dovish," he said.

Source: Theedgemarkets