AUSSIE BONDS: Yields Lag US Moves, RBA +70% Priced For A Hike Next Week

G10 currency moves have been limited in pre-New Year APAC trading. The BBDXY USD index is flat and has traded in a narrow range of 1202.76/1203.48. The largest mover has been the kiwi with NZDUSD is down 0.2% to 0.5780 off the intraday low of 0.5776 but still higher overall in December. 

• Aussie’s outperformance of kiwi continues helped by its more hawkish central bank and the recent rally in metals. AUDNZD is 0.2% higher at 1.1585, close to the intraday high at 1.1589. The pair is up 1.4% this month and with the RBNZ likely to be on hold through most of 2026 but the RBA possibly hiking, the upward pressure is likely to be maintained.
• Despite today’s decline in copper and silver prices, AUDUSD has held steady around 0.6696 and traded in a narrow of 0.6691/0.6701 with breaks above 0.6700 very brief.
• USDJPY is up 0.1% to 156.52, close to the intraday peak, but continues in the range around 156.00 seen since it peaked at 157.78 on 19 December. There has been no news out of Japan today and the equity market is shut.
• European currencies are slightly weaker against the greenback with EURUSD at 1.1741 and GBPUSD 1.3463. EURGBP is flat at 0.8722 after reaching 0.8727.
• Equities are mixed with the S&P e-mini down 0.1% and Hang Seng -1.0% but TAIEX up 0.9%. Copper is down 1.2% and silver -5.0%, while iron ore remains around $105.50-106/t. Oil prices are up slightly following news of a Ukrainian strike on a Russian refinery. WTI is +0.2% to $58.04/bbl.
• Later US jobless claims print. European stock markets are either closed or have early finishes, which includes the UK. 

Oil has been trading in narrow ranges today and yesterday driven by holiday-affected thin volumes. Crude was 0.3% lower on Tuesday and is down slightly today and is set to post a decline of close to 1% and 20% in December and 2025 respectively as concerns regarding a record 2026 surplus driven by higher OPEC and non-OPEC output outweighed ongoing geopolitical tensions in oil-exporting regions. 

• WTI is down 0.2% to $57.86/bbl and has traded in a range of $57.79/57.96, while Brent is 0.1% lower at $61.28/bbl after a high of $61.33 followed by a low of $61.16.
• Inventory data are being monitored for signs of excess supply and Bloomberg reported a US crude inventory build of 1.7mn barrels with 800k at Cushing last week, according to people familiar with the API data. There were also product builds. The official EIA data will be released Wednesday.
• While geopoliticals are unlikely to drive oil price trends, unless there’s a surprise, they could provide a floor and drive volatility. The market will watch developments closely.
• Negotiations for a Ukraine peace will be monitored with attacks on Russian energy infrastructure also likely to impact the market. Today Russia reported extinguishing a fire at its Tuapse refinery.
• The US blockade of Venezuela continues and storage facilities in the country are filling up driving cuts to production. US strikes on docks and alleged narcotics boats will also be watched. The US has also bombed militants in Nigeria.
• Protests in Iran, a resumption of its nuclear programme and general Middle East stability will remain a focus given the region provides over a third of global oil exports, according to the International Association of Oil & Gas Producers.
• Later US jobless claims print. European stock markets are either closed or have early finishes, which includes the UK. 

The official China PMIs for December showed an improvement in activity with both manufacturing and non-manufacturing returning to growth. The composite PMI rose to 50.7 from 49.7, which had been the first move below the breakeven 50-level since December 2022. 

• The manufacturing PMI improved to 50.1 up from 49.2 and higher than expected. While one month doesn’t make a trend, December may signal the end of the contraction in activity in the sector that began in April. Confidence in the outlook picked up to 55.5 from 53.1.
• The recovery was driven by higher output but also new orders which returned to positive territory at 50.8. Orders growth was driven by the domestic economy with export orders continuing to contract but at a slower pace than most of the year.
• The outcome was confirmed by the RatingDog December manufacturing PMI at 50.1 up from 49.9.
• Non-manufacturing also shifted slightly into growth territory at 50.2 from 49.5, which was also stronger than consensus. Most components continued to contract though but at a slower pace than last month but expectations were very positive at 56.5. New orders remained weak at 47.3 but up from 45.7, while export orders deteriorated to 47.5 from 47.9.
• Manufacturing and non-manufacturing selling prices continued to decline in December despite positive input cost inflation. This signals that China’s inflation rate is likely to remain close to zero.