Key Events This Week: December 14th – 19th:
Tuesday: GBP Consumer Price Index, Core Consumer Price Index EUR German ZEW Survey
Wednesday: GBP Bank of England Minutes, Employment Change USD Consumer Price Index, FOMC Rate Decision
Friday: CAD Consumer Price Index
Market expects the Fed to drop the ‘considerable’ phrase at the upcoming FOMC meeting, which alongside some more hawkish comments and strong US data has boosted USD. Worth noting that USD long positioning is stretched, there could be room for a pullback, or at least a pause, into year end, but we would use any dips in USD as a buying opportunity. Higher US rates is not the crux of the strong USD argument, it’s US growth, which is likely to remain strong.
Market believes EUR is likely to remain a sell over the course of 2015 as ECB easing remains a prominent possibility and political risks loom large. Comments from ECB members suggest the committee is moving towards further easing in January. What’s more, with Greek elections now before the end of the year, political risks are rising in Europe, which could add a risk premium to EUR. All this said, EUR short positioning although reduced is still somewhat stretched, so there is a risk of a profit taking pullback into year end.
The JPY is currently being driven by local risk appetite. Should there be a round of profit taking in the equity markets then this could bring the JPY higher from here, bringing some near term risks to our medium term bearish JPY view. Abe looks set for a landslide victory in tonight’s election on very low turn out. With an Abe victory priced in the focus may turn to the weaker growth outlook. This may be determined by weakness in Japan’s trading partners. This week we will be watching the inflation print.
Market remains bearish on GBPUSD. The BOE believes inflation could fall further, and markets have pushed back their estimate of the timing of the first hike. What’s more, the latest OBR forecasts suggest that the UK’s fiscal position is worse than previously thought. Further austerity is likely, which will weigh on UK growth, supporting the markets bearish view. We will watch CPI this week.
Market expects AUD to remain weak for several reasons. First, Chinese growth remains soft. PPI has printed negative for 33 months in a row, and the recent rate cut has not loosened financial conditions. Second the latest news on Australian banks suggests that they could have to raise capital, providing further headwinds to growth. Third, iron ore prices have barely recovered. Soft commodity prices should also weigh on AUD. At the end of last week RBA Governor Stevens voiced a preference for the AUDUSD to trade at 0.75 v 0.85.
Oil prices have fallen over 40% since the start of June, yet CAD is down only 5% against USD, the least of any G10 currency. CAD’s exposure to a robust US economy renders it the strongest commodity currency, market believes USDCAD is likely to rise as oil prices decline.
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