Key Events This Week: December 21st – 26th:
Tuesday USD Durable Goods Orders CAD Gross Domestic Product
Thursday JPY National Consumer Price Index
Market seems to believe the USD correction is likely done aside from any end of year short term profit taking 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 labour market, which markets took as a more positive sign. While markets look for a Fed hike in 2015, they are expecting easing from many other G10 central banks, which should support the strong USD view.
Last wejs 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 only to be hit with an FOMC, SNB one two at the end of the week. The combination of the hawkish FED and the SNB announcing negative interest rates sent the EUR back to lows. Going into 2015, markets continue to anticipate a substantial broadening of the ECB’s asset purchasing programme, leading to the EUR being used as a funding currency and the market increasing short EUR positions.
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. Markets remain of the view that the JPY will be the weakest performing G10 currency. BOJ policy should lift inflation expectations resulting in negative real rates which, coupled with normalisation of Fed policy, will lead to JPY capital outflows. Official comments are likely to become geared to maintaining two-way price action.
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.
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.
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
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