Renewed signs of economic divergence lift the AUD and USD

The strong Aussie employment data seen yesterday pushes the AUD to the top of the pack, gaining ground vs all major currencies and notably vs JPY in G10. A 25bp cut from the RBA in February 2025 is still the base case in market pricing, but as we increase the probability of various G10 central banks step up the pace of easing – with some feeling the RBNZ cut by 75bp in November, the BoC cut 50bp on 23 October, and if the ECB step up to 50bp in the December meeting - the RBA and the Norges banks, and to a lesser extent the Fed, are the clear outliers.

We watch for the Aus Q3 CPI print on 30 Oct, but when the Australian labour market is tightening, with the last six consecutive employment reads well above market consensus, the Aussie household shouldn’t be factoring in rate cuts into their budgets just yet.

A subtle but important shift in the ECB’s thinking

The ECB meeting lacked any major new substance to get EUR traders fired up. They cut by 25bp, as was fully expected, and gave off a dovish message, which should hardly surprise given recent inflation and growth trends. The ECB acknowledged that the disinflationary process was well on track and that price pressures have eased due to weakness in indicators of real activity, where a focus towards more forward-looking aspects of data indicators does present a present a subtle, but potentially important, change in their thought-process.

If the ECB are putting increased weight on the output gap and where growth is tracking relative to potential, then there is a clear argument for the ECB to move away from its gradualist approach to easing, and to move away from its continued guidance of keeping “policy rates sufficiently restrictive for as long as necessary”. Subsequently, EU interest rate swaps pricing shows that traders have increased their implied probability of a 50bp cut in December, with 38bp of cuts now priced here – essentially, it’s a line ball call if they ease by 25bp or 50p in December (the ECB don’t meet in November), but that view could be cemented as receive the next set of PMI’s and other activity data points.

EURUSD has traded lower on the day with spot hitting 1.0811 – but that was not driven to the ECB meeting, but rather the US retail sales report, which at 0.4% in the advanced read, and 0.7% in the ‘control group’ element, were hotter than consensus and again feeds into the economic divergence thematic. The control group element came in more than double market consensus, and it’s not a surprise that the Atlanta Fed Nowcast model implies that the US economy is tracking at an impressive 3.41%.

US Treasuries responded off the bat, with yields on the 10-year rising from 4.03% to a session high of 4.10%, while short-end yields rose 4bp, as further rate cuts were repriced out of the rates curve. A 25bp cut in November is still offered an 85% probability, but the odds of a further 25bp cut in the December meeting have been modestly reduced. We also saw the yield premium on US 10-year Treasuries over German 10-year bunds rise 5bp to 1.88% and this has been the backbone of EURUSD selling.

EURAUD shorts also get good attention from tactical traders playing the central bank divergence theme, and we see sellers fading the move from the upper bound of the bear channel it has held since August – holding shorts for 1.61 seems logical to me. USDJPY also screens well and has pushed above the consolidation high of 149.98 and above 150.00. The risk of a further push towards 152.00 has clearly increased, although JPY traders will need to navigate today’s Japan’s CPI print (due 10:30 AEDT), where the market eyes headline inflation at 2.5% (from 3%) and core CPI at 2.3% (from 2.8%) – an outcome that hardly screams of near-term BoJ hiking risks.

Gold eyeing a test of $2700 – higher levels favoured

Screening for market movement, we see that gold may not have had an explosive net percentage change, but in a backdrop of a stronger USD and a 4bp lift in US 10yr real rates, the fact we’re still eyeing a move into $2700 is impressive. Gold is higher on the day in all G10 currencies, which speaks to real demand for the yellow metal, and one where the path of least resistance remains to the upside. The question for those bullish on gold in the near term and riding this trend is whether to gain exposures in XAUSUD or in XAUEUR or XAUJPY and take out the strong USD effect.

US equity trading a low energy tape – Netflix delivers US equity never really found a rhythm and despite solid earnings from TSMC, which initially flowed through into improved sentiment towards Nvidia and other AI/tech plays, the S&P500 and NAS100 couldn’t kick into gear. As those that traded our US indices intraday will attest to, price action and the broad tape moved in a range for most of the session, before tailing off into the close, with both indices unchanged on the day. Energy and tech closed +0.4% respectively, with financials also holding up well, with selling seen in utilities, comm services and REITS.

In the after-market session, we saw numbers drop from Netflix drop and while we haven’t seen the -/+7% move implied in options pricing, the stock trades 3.5% higher, with pockets of interest from clients in our Netflix 24-hour CFD. The market likes the story, and despite increasing competition, Q3 streaming paid increased by 5.07m and well above the streets forecast of 4.52m, with Q4 and 2025 guidance on EPS, sales and operating margins also coming in nicely above expectations. While the stock has had a good run YTD, this result justifies the returns and after a mini pullback into $687, new highs now look probable.

Turning to Asia our calls are mixed with the NKY225 eyed higher, largely due to a weaker JPY and outperformance from tech, while we see a weaker open in HK and the ASX200. BHP’s ADR sits -1.1%, which may offer some indication of the direction of travel on open for resource names. But with the ASX200 closing at ATHs, valuation may be working against the risk-to-reward trade-off, but there is real momentum here and it feels that dips will be bought – at least, on the news flows we’re seeing.

Good luck to all.