"EURUSD Parity Could Be Reached In The Next 6 Months"
By Philip Marey, senior US strategist at Rabobank
EUR/USD has been trending downward this week, in line with our expectation that parity could be reached in the next 6 months, as the ECB continues to cut and the Fed’s room to cut is likely to be limited by the new policies of the Trump administration that may fuel inflation. Yesterday, the SNB and the ECB cut their policy rates.
As flagged by our Jane Foley, the SNB surprised the consensus by making a 50 bps cut, instead of 25. The SNB said that underlying inflationary pressure has decreased again this quarter. The SNB’s easing of monetary policy yesterday takes this development into account. The SNB will continue to monitor the situation closely, and will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term. Although the SNB only meets 4 times a year, Schlegel said that the SNB can decide on policy between quarterly meetings. The SNB has also reiterated that it is willing to be active in the FX market as necessary. Looking further ahead, Schlegel said that the SNB doesn’t like negative rates but they do work.
The ECB made a more modest cut of 25 bps, in line with expectations. The ECB cut the deposit facility rate to 3.00% and removed the remaining hawkish part from its policy statement. All PEPP reinvestments will be discontinued as of the end of the year. The growth forecasts were downgraded somewhat and the economic projections are fully in line with price stability. However, risks remain, and the ECB does not consider its mission accomplished. We expect little opposition to the next two rate cuts. But when the policy rate reaches 2.5%, we would expect to see growing discord in the Governing Council. For more details, we refer to Bas van Geffen’s ECB post-meeting comment.
Yesterday, the US PPI for November was higher than expected. The PPI final demand rose to 3.0% year-on-year (beating the consensus expectation of 2.6%) and there was an upward revision to the October rate from 2.4% to 2.6%. At the same time, the initial jobless claims unexpectedly rose to 242K in the first week of December, from 225K in the final week of November (upward revision from 224K). The 2y US treasury yield seemed to react more to the jobless claims than the PPI and fell after the simultaneous release of the data, before rebounding later in the day.
Weekly wrap: divergent central banks
On Wednesday, two central banks in the Americas headed in different directions. The Bank of Canada cut the policy rate 50bp, bringing the policy rate down from 3.75% to 3.25%. This decision was around 80% priced in by the market, and we were in the majority of analysts who correctly forecasted this decision. The decision was followed by a press conference with Governor Macklem and Senior Deputy Governor Rogers. The Bank did mention the unemployment rate, quoting that in November, “employment continued to grow more slowly than the labour force,” but chose to direct its justification for the cut towards slowing GDP growth. We expect three cuts from the Bank of Canada throughout 2025, starting with a 25bp cut at the January 29th meeting, bringing the overnight rate target down to terminal 2.50% by the middle of next year. We maintain the view that the risks to our outlook remain skewed towards more and deeper cuts. In terms of USD/CAD, we expect interest rate differentials to continue boosting the pair and are still forecasting a move to 1.46 on a nine-month view. For more details, see the Bank of Canada post-meeting comment by Christian Lawrence and Molly Schwartz.
In contrast to the Bank of Canada, and the SNB, and the ECB, the Copom of the Banco Central do Brasil unanimously decided to hike the Selic rate to 12.25%, with an increase of 100 bp, more than we and the market consensus had expected (75 bp). The Copom's inflation projection over the relevant monetary policy horizon (26Q2) continued to rise compared to the previous meeting (to 4.0% y/y, which is 30 bp more than the previous, November, meeting, or 100 bp above the target), even after incorporating market expectations that the Selic rate would be raised to 13.75% by the May 2025 meeting and would remain practically unchanged throughout 25H2. The Copom continues to see an upwards asymmetry in the balance of risks to inflation. This time, the Copom mentioned that the risk premium, inflation expectations, and the exchange rate have been affected by the perception of economic agents following a recent fiscal announcement. Thus, it concluded that, in the face of "additional unanchoring of inflation expectations, rising inflation projections, stronger-than-expected activity dynamism, and greater-than-thought widening of the output gap," monetary policy needs to be even more contractionary. More surprisingly, the Copom has already announced at least two more increases of the same size in the upcoming meetings. Given the more hawkish stance, it seems to us that the Copom will hike the Selic to 15.00% in 2025 (instead of 13.00% previously). Thus, in addition to two 100-bp hikes, we now expect a 50-bp hike at the May-2025 meeting and a remaining 25-bp hike at the June-2025 meeting. Rate cuts should come in 2026 if inflation expectations resume convergence back towards the 3.0% target. The release of the minutes of this meeting next Tuesday and the 24Q4 Inflation Report next Thursday will reveal more details about the reaction function and the Central Bank's revealed preferences in light of their analysis on inflation and the state of the economy. For more details, see the BCB post-meeting comment by Mauricio Une and Renan Alves.
Earlier, on Tuesday, the Reserve Bank of Australia made a dovish pivot. The RBA left rates unchanged as expected. However, its guidance was interpreted not only as taking the risk of another rate hike off the table, but also opening the door to a possible rate cut in February.