Week Ahead: Trading Outlook

Key Events This Week: January 4th – January 8th

Mon: EUR – German CPI, USD – ISM Manufacturing
Tue: EUR – German Unemployment, EZ CPI
Wed: USD – ISM Non Manufacturing, FOMC Minutes Release (Dec 15/16 meeting)
Fri: USD – Non Farm Payrolls & Unemployment Rate, CAD – Unemployment Rate
Sat: CNY – CPI

Overview

  • USD The US Dollar strengthened in response to the Fed raising rates from 0.25bps to 0.50bps. The prospect of a further four increases in rates next year keeps the bullish USD view intact. The Fed expect inflation to rebound as transitory effects dissipate and have noted the lessening of threats posed to the US economy from global factors. Attention this week will first be on the minutes release from the pivotal “lift-off” meeting with traders keen to gauge the Fed’s position on the nearness of the first post lift-off increase. Attention will then shift to the December NFP’s and Unemployment rate on Friday as the first major US data of the year.
  • EUR The single currency was sharply lower over the week prior to lift-off driven first by the anticipation of a US lift-off and finally by the reaction to the event. Clear policy divergence is now in play between the US and Europe and whilst markets responded with disappointment to the ECB’s latest measures it is likely that the Fed’s action should be enough to pressure EUR lower, taking some pressure off the ECB to enact further policy adjustments next year. EURUSD remains right in the middle of its 2015 range with the ECB seemingly unhappy above 1.15 and the Fed unhappy below 1.06. Domestic data focus will be on EZ CPI which is expected to show an improvement.
  • GBP Sterling has continued in free-fall since US lift-off  as the latest UK wage growth data confirmed for many the  fear that momentum was stalling. Average weekly earnings fell back from 3% to 2.4%. The unemployment rate contracted further in the 3mths to October but was not enough to support Sterling which was then driven lower by USD strength in the wake of lift-off. This latest wage growth data endorses the unwinding of UK rate hike expectations as one of the key drivers behind the argument for UK lift-off starts to fade.
  • JPY Despite being heavily sold ahead of and in reaction to US lift-off, the Japanese Yen managed to rebound sharply on the week to reclaim the majority of losses. The action was driven by the BOJ’s December meeting which saw the central bank once again sticking to its guns and refraining from further easing. Although the size of its quantitative easing package remains the same the BOJ did make some technical adjustments to its ETF purchase program. The BOJ retain their optimistic outlook for the domestic economy, bolstered by an upward revision to recent 3Q GDP which was actually shown to have expanded rather than contracted as initially suggested by the data. In the near term, JPY remains supported but many players feel the adjustments to the ETF purchases are simply a stop-gap ahead of further easing next year.
  • AUD The Australian Dollar has remained resilient in the wake of a US lift-off. The RBA December meeting minutes release saw the central bank sounding upbeat about the domestic economic outlook, expecting growth to pick up steadily over the next two years, despite inflation remaining below its target level which may see scope for further easing in future if the outlook doesn’t improve. The rebound in commodity prices continues to support rate with the forecast improvement in Chinese CPI likely to see further upside if expectations are met.
  • CAD The Canadian Dollar continued its relentless decline amidst US lift-off as Oil prices continued to forge lower ground and the US Dollar strengthened. Oil, which plumbed a new multi-year lows at $34.50 per barrel in December last year, is weighing significantly on the Canadian Dollar’s trading outlook and boosting expectations for further easing by BOC. Canadian CPI on last month came in below expectations compounding expectations for further BOC easing. Traders will be keeping an eye on domestic Unemployment data on Friday alongside Oil prices, with Crude currently holding around the $37 per barrel level.