Key Events This Week: December 7th – 13th:
Thursday: AUD Unemployment Change
Friday: USD Retail Sales
USD continues to see strength as data outperforms, and central banks elsewhere ease further. At the moment, we believe USD can strengthen even without the support of yields, as the US remains a relative growth outperformer, illustrated by the recent upward revision in GDP and robust labour data released Friday. Increases in wages will be necessary for the Fed to take a more hawkish stance. This week focus will be on the potential impact of lower oil prices on US retail sales.
The market had positioned for a more doveish stance at the latest ECB meeting, and the central bank failed to meet stretched expectations. The central bank kept a dovish tone, aggressively lowering its inflation forecasts, with scope for even further downward revisions if oil prices remain soft, and explicitly mentioned it is considering further unconventional measures. The ECB stance coupled with the robust labour data out of the US on Friday kept the Euro pressured into the close. The market clearly maintains a medium term bearish view which may be subject to further short term volatility as player take end of year profits on positions.
Polls are suggesting that Abe will take a landslide victory in the upcoming elections, which should boost USDJPY. Market remain JPY bears against USD, as expectations are for Abenomics to be successful, increasing the risk appetite of Japanese investors. However, should reforms progress slower than the market anticipates, JPY could outperform on the crosses. What’s more, any concerns about global risk appetite would also offer support to JPY.
GBPUSD remains under pressure due to increasing fiscal and political uncertainties. The latest OBR budget revised borrowing higher, suggesting that the UK could have to enact growth dampening austerity measures in the future. Political uncertainty could also influence foreign portfolio inflows in 2015, further adding to pressure on GBP.
Despite some respite in iron ore prices, the AUD continues to decline. We remain bearish since economic indicators are weakening, such as 3Q GDP undershooting market expectations, inflation expectations are falling and subsequently rate cut expectations from the RBA are starting to be priced into next year. As market expectations for a rate cut increase this would support the markets bearish view. Market will also be keeping an eye on commodity prices as these support bearish AUD.
The BoC delivered a slightly more hawkish statement than markets had anticipated this week. The most important comment was the bank’s assessment that ‘the output gap appears to be smaller’ than projected at the last meeting. As such, this implies an earlier hike than markets were previously expecting. The BOC also acknowledged recent data strength.
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