Fed Chair Powell’s speech last week gave a boost to risk and stock markets as he appeared confident in the central bank’s ability to eventually bring inflation back to target. The Fed now wants to avoid overtightening the economy into a recession and this theme eased aggressive rate hike fears. Market pricing currently implies a 50bp rate increase next week, followed by a similar move early next year that pushes rates to 4.85%. The Fed is then expected to stay on hold for several months, before cutting rates towards the end of the year. 

But the recent sharp falls in the dollar and Treasury yields are loosening financial conditions and undermining policymakers’ efforts to push down high price pressures. The greenback closed last week near its lows and below August support on the DXY index. Gold is benefitting in this environment. Bugs will look to use the 200-day SMA at $1795 as a springboard to more gains towards $1840.

The RBA meets on Tuesday, having raised rates at every monthly board gathering since May. Inflation is expected to hit the 8% level this quarter so the target band of 2-3% is way off. But external risks have intensified as the Chinese economy loses steam. AUD needs to climb above 0.68 to see more upside. Buyers will target the 200-day SMA at 0.6921 which has capped prices since June.

The Bank of Canada policy decision on Wednesday may cause some volatility as markets are torn between a 25bp and a 50bp rate hike. Neutral guidance from policymakers could weigh on the loonie, especially if they indicate we are very close to the peak rate. Chart signals are mixed with the recent bounce in USD/CAD coming into heavy selling above 1.36.

In China, focus remains on any new signals around the zero-Covid and economic policies. USD/CNH moved sharply lower last week and may offer support to AUD and NZD if it continues falling.

Major risk events of the week

06 December 2022, Tuesday:

–RBA Meeting: Markets anticipate that the RBA will lift the cash rate 25bps to 3.10%. The central bank slowed the pace of tightening in October back to 25bp increments, with the policy arguably moving into the contractionary zone. But inflation is still challenging, and the labour market is the tightest in 50 years.

07 November 2022, Wednesday:

– Bank of Canada Meeting: Analysts are split between a 25bp or a 50bp rate hike. The former would take the policy rate to 4%. Inflation remains well above target, inflation expectations remain too high, and the labour market is tight. But policymakers might be keen to see how past rate increases have hit the economy. 

09 December 2022, Friday:

– University of Michigan Sentiment Survey: The market median estimate is for a rise to 56.8 from 54.7 in November. Higher interest rates, a potential recession and sticky, elevated prices made consumers less confident about where things were heading. Better news on inflation may provide a boost to sentiment.