AUSSIE BONDS: Market Carnage As UE Falls, 2x 25bp Hikes By End-26

USD/CNH spot has broken to fresh lows, currently near 7.0210, levels last seen at the start of Oct 2024. Aiding sentiment has been onshore spot USD/CNY breaking under 7.0300. Onshore spot CNY gains have accelerated in recent sessions, with the pair managing to break under support that held ahead of the 7.0400 figure level.  For USD/CNH this continues to create risks of a test of the 7.000 handle, which we saw briefly in Sep last year.

• Earlier, we had the USD/CNY fix (7.0523), which was set comfortably above market forecast, but still made a fresh low to Sep last year. The fixing error was quite high at +227pips, which is close to record highs for the fixing error since 2018 (when BBG started compiling market consensus forecast for the fixing outcome.).
• Still, the fact that the actual fixing continues to track lower and onshore spot is only modestly below the fixing (officially allowed to deviate to -2% from the fixing in USD/CNY terms) suggests there is more room for spot USD/CNY to track lower. This in turn creates lower USD/CNY fixing risks in sessions ahead (assuming broader USD sentiment stays softer as well).
• For now the market seems comfortably that the authorities are not pushing back hard on yuan appreciation pressures. This may change if we test under 7.000 ahead of year end.  

The December Bloomberg survey showed a median upward revision to consensus cash rate forecasts in 2026 as well as H1 GDP growth driven by stronger investment. A lot of forecasters have taken out easing expectations from their projections with some adding tightening. Headline inflation is little changed with analysts continuing to project it to return to the RBA’s 2-3% band in Q3 2026 as the impact of government electricity rebates drop out of the annual comparisons. 

• The median forecast for the cash rate is 3.6% through to the end of the time horizon to Q1 2028, implying analysts now expect rates to be on hold. This is a change from a full 25bp cut expected by Q3 that left rates at 3.35% in the November survey.
• Some forecasters now expect a 25bp hike in Q1, likely at the February monetary policy statement meeting. CBA expects 25bp in February, NAB & Capital Economics 25bp in February and again in Q2, while JP Morgan has 50bp of tightening in H1 2027.
• In contrast, Westpac still expects the RBA to ease but has pushed it out a quarter with 25bp in Q2 and again in Q3 2026 leaving rates at 3.1% and Morgan Stanley in Q3 and Q4 2026.
• The December RBA minutes said that if financial conditions were not “sufficiently restrictive” enough to bring demand and supply back into balance and that the rise in inflation proved to be more persistent and drives a pickup in expectations then a rate hike “might need to be considered” in 2026.
• Consensus unemployment rate projections are little changed with Q4 2025 averaging 4.4% and Q4 2026 4.5%.
• The Bloomberg survey was taken over 5-12 December. The last RBA decision was 9 December.

Australia cash rate expectations

Source: MNI - Market News/Bloomberg Finance L.P.

China bond futures have had one of their strongest days in December as bond futures posted gains Tuesday.  A report in the Shanghai Securities news citing the Chief Macro Analyst from Golden Credit Rating could be behind it as the report suggests that cuts to rates and RRR's will come in Q1 2026.  

• The 10-Yr is up +0.21 today to 108.15 trading through the 20, 50 and 100-day EMAs.  The 10-Yr is now wedged between the topside resistance from the 200-day EMA at 108.30 and the downside resistance from the 100-day EMA of 108.09.
• The 2-Yr is up +0.05 to 102.51, above all major moving averages, having traded through the 200-day EMA of 102.49 this morning.  
• Cash is stable with the 10-Yr CGB down -0.5bps to 1.83% and the 2-Yr at 1.37%