The Week That Was…
Policy makers continued to dominate the foreign exchange markets this week with the key highlight being the FOMC meeting and Janet Yellen’s press conference, Yellen held the line and confirmed that the FED were on track for a 2015 move to normalise monetary policy.
The continued hawkish stance of the FED gave the USD further support and pressured the majors to test and break recent lows. The theme of monetary policy divergence remains one of the markets favoured strategies and the rhetoric has reinforced this as 2014 draws to a close.
The market expects downside in EURUSD while USDJPY should continue its ascent, post any end of year profit taking volatility the market looks set to reposition to capitalise on these thematic trades for the beginning of 2015.
- USD Market seems to believe the USD correction is likely done aside from any end of year short term profitaking volatility, particularly after the Fed did not put too much emphasis on downside risks to inflation in the FOMC’s press conference. Rather, the press conference focused on the strength of the labor market, which markets took as a more positive sign.
- EUR The risk off environment has seen positions being unwound and with some of these potentially being funded in EUR, the EUR had gained some short term support at the beginning of the week onlt to be hit with an FOMC, SNB one two in recent days. The combination of the hawkish FED and the SNB looking to negative interest rates sent the EUR back to lows.
- GBP Markets remain bearish on GBPUSD. The inflation rate is now at 1% and markets see risks of it falling further especially since oil prices have weakened. While the BoE has suggested that they could look through the low oil prices when deciding when to raise rates, the performance of GBP over the coming months is likely to be increasingly related to politics which markets believe could have a negative impact.
- JPY The JPY continues to be driven by local risk appetite and so there could be support into year end. However the markets medium term bearish view remains. Now that the snap election is out of the way, the focus may turn back to the low inflation and growth outlook. Both of which look weak.
- AUD Having broken below the key 0.82, the outlook for the AUD remains bearish in our view. With China’s economy showing signs of further weakness such as with the HSBC PMI, the external trade environment remains weak for Australia. In addition, markets remain cautious on the macro outlook. Declining commodity prices, especially iron ore, also do not bode well for the currency.
- CAD Given the sharp decline in oil prices, CAD’s resilience relative to other energy exporters has been impressive. This is particularly because Canada has a more diversified economy and high trade exposure to the robust US economy. Markets remain bearish on the CAD against the USD but are also now starting to see the themes change against the other G10 currencies. Should oil prices remain low then the performance of CAD could be hindered
- EURUSD Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish
- GBPUSD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish
- USDJPY: Short Term (1-3 Days): Neutral – Medium Term (1-3 Weeks) Bullish
- USDCAD: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bullish
- AUDUSD: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bearish
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