Key Events This Week: January 11th – 16th:
Tuesday: GBP December CPI
Wednesday: USD Retail Sales
Thursday: AUD Labour Report EUR German GDP USD Initial Jobless Claims
Friday: EUR Eurozone CPI USD December CPI, University of Michigan Confidence
USD should continue to strengthen over the next few weeks for a few reasons. First, while US growth has come off somewhat, highlighted by the mixed jobs data on Friday that saw weaker wage growth, it remains at robust levels, particularly when compared to lack luster economic data in other regions. Second, the latest FOMC minutes suggested that the Fed views current levels of inflation as temporary, and sees downside risks and upside risks to the economy as balanced. This contrasts with central banks elsewhere, where we have seen a much more doveish tone.
EURUSD has continued to decline due to falling inflation expectations leading to the increased market expectation that the ECB will announce a QE programme. With the region now in deflation, the market maintains a net bearish outlook on the currency. The ECJ’s ruling on the OMT will be a key risk event this week. After that there is the January 22 ECB meeting and the Greek elections. All these events will likely bring volatility.
The JPY has gained support over recent days due to falling risk appetite. Now falling global bond yields have decreased yield differentials between Japan and the rest of the world reducing the incentive for JPY investors to export capital, a supporter for the currency. There is a risk, however, of weaker inflation bringing the BOJ easing debate back. Should this occur then that would weaken the currency over the medium to long term.
GBP has started the year on a weak footing, and the market expects this will continue into 2015. Political uncertainty, a softening growth outlook and declining inflation are likely to weigh on GBP. What’s more, we have begun to see signs that investment inflows into the UK have slowed, which leaves the currency vulnerable given its trade deficit. The upcoming inflation print will be the key release this week.
AUD looks poised to weaken over coming weeks as high yielders face pressure against USD. Should risk continue to weaken, due to a combination of concerns about slowing global growth and political risks in Europe, high beta currencies such as AUD could see pressure. Growth in China will also be key for AUD. On this front, the December data due out over the next week will be important to watch.
CAD has been supported by a robust US growth outlook, and has outperformed its commodity currency peers. However, falling oil prices will impact the economy given the large amount of oil production. Beyond the direct effect of lower oil revenues, this also poses a risk to banks and real estate, both of which have indirectly boomed as a result of oil over recent years. The market believes the USDCAD is now poised to head higher.
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