RBNZ Goes Big Again

• RBNZ delivers a third consecutive jumbo cut. NZD initially fell, then rallied against all major currencies.

• UK January CPI was mixed and argues against back-to-back BOE policy rate cuts. GBP reaction was muted.

• Australia wage growth cooled in Q4, leaving the RBA room to keep easing.

USD is directionless near two-month lows, Treasury yields are holding on to yesterday’s gains, and US equity futures point to a positive open. US President Donald Trump said yesterday he’s considering tariffs “in the neighborhood of 25%” on automobiles and at least 25% on semiconductors and pharmaceutical products, adding they would “go very substantially higher over the course of the year.” Trump indicated again he would “probably” provide final details on automotive tariffs on April 2.

We continue to look through the tariff noise and focus on the underlying fundamental drivers that favor dollar strength. The US economy is in a good place and inflation is stalling above 2%, suggesting the bar for additional Fed funds rate cuts is high. The implication is the US will maintain a wide bond yield advantage against all other major economies.

Moreover, the US TIC data showed underlying demand for the dollar is robust. Net foreign purchases of long-term US securities totaled $1153bn in the 12 months to December, eclipsing over the same period the cumulative US trade deficit of -US$918bn.

The FOMC minutes of the January 28-29 meeting will be published later today (7:00pm London). At that meeting, the FOMC unanimously voted to keep the target range for the Fed funds rate unchanged at 4.25-4.50% while Chair Jay Powell stressed that “we do not need to be in a hurry to adjust our policy stance.”

The minutes may offer more insights behind the reason the statement removed previous reference that “inflation has made progress toward the Committee's 2 percent objective.” When asked about that omission, Powell said at the time it was not meant to send a signal but rather to shorten the sentence on inflation. We find this hard to believe given that the Fed knows the market is hanging on its every phrase and wording.

Fed Vice Chair Philip Jefferson speaks on the household balance sheet (10:00pm London). This is a noteworthy speech because strong US household balance sheet is a key factor underpinning consumer spending activity.

UK

UK January CPI was mixed, and GBP reaction was muted. Headline CPI increased 3.0% y/y (consensus & BOE projection: 2.8%) vs. 2.5% in December while core CPI matched consensus at 3.7% y/y vs. 3.2% in December. Encouragingly, services CPI rose less than anticipated to 5.0% y/y (consensus: 5.1%, BOE projection: 5.2%) vs. 4.4% in December and suggests the BOE can afford to keep easing at a gradual pace.

Markets still imply a total of 50bps of BOE policy rate cuts over the next 12 months. But the BOE’s job is complicated by the UK’s near-term stagflation backdrop which is an ongoing drag on GBP.

JAPAN

USD/JPY is trading heavy as Japan’s 10-year bond yields hit the highest level since 2009. Hawkish Bank of Japan (BOJ) Board Member Hajime Takata argued for more policy rate hikes. Takata noted “it will be important for the bank to consider continuing to implement gear shifts gradually, even after the additional rate hike decided in January, in order to avoid creating excessively high expectations of continued monetary easing.” Markets imply the policy rate to peak at 1.17% over the next three years. Japan’s January CPI print, due tomorrow, will either reinforce or curtail current rate hike expectations.

NEW ZEALAND

RBNZ delivers a third consecutive jumbo cut. NZD initially fell, then rallied because the RBNZ signaled again it does not forecast to slash the Official Cash Rate (OCR) below neutral (around 3%) throughout its projection horizon.

As was widely expected, the RBNZ slashed the OCR 50bps to 3.75%. The RBNZ highlighted that “if economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025.” Indeed, Governor Adrian Orr flagged more modest 25bps cuts in April and May.

The RBNZ expects to lower the OCR at a faster pace than projected in November. The RBNZ pencils-in the OCR to bottom at 3.10% by Q1 2026 vs. Q1 2027 in November while markets price-in a lower terminal rate of 2.60% over the next 12 months. Bottom line: NZ-US 2-year bond yield spreads can further weigh on NZD/USD.

AUSTRALIA

AUD/USD is consolidating near a 2-month high around 0.6360. Australia wage growth cooled in Q4, leaving the RBA room to ease further. The wage price index rose 0.7% q/q (consensus: 0.8%) vs. 0.9% in Q3, matching the lowest quarterly rise since Q1 2022. Annual wage growth slowed in line with consensus and RBA projection to 3.2% vs. 3.6% in Q3. The RBA signaled it will pay particular attention to labor market development to guide future policy decision. As such, Australia’s January labor force survey due tomorrow will help guide near-term RBA policy rate expectations. Interest rate futures currently imply almost 75bps of RBA cuts over the next 12 months.

CANADA

USD/CAD is holding under 1.4200. Canada’s January CPI report suggests the Bank of Canada (BOC) will likely pause easing at its next March 12 meeting. Core inflation (average of trim and median CPI) ran hot rising to 2.7% y/y (consensus: 2.55%) vs. 2.55% in December and tracking above the BOC’s Q1 projection of 2.5%. Otherwise, headline CPI inflation matched consensus at 1.9% y/y vs. 1.8% in December.

Markets price-in over 40% odds of a 25bps BOC policy rate cut in March. And a total of 40bps of easing over the next 12 months. In our view, USD/CAD is vulnerable to more upside supported by FED/BOC policy trend and trade uncertainty.