Week Ahead: RBA, ECB, NFP, EUR Bears Into Draghi's Long Game
Next week will be crucial for the outlook of EUR/USD. The December ECB meeting, Yellen’s speeches at the Economic Club in Washington and the US Congress, as well as the November US NFP are likely to determine whether investors will continue to sell EUR and buy USD.
Going into the ECB meeting, we expect a 10bp deposit rate cut and QE extension until March 2017. Draghi should also keep the door wide open for more easing if needed.This may seem conservative compared with market expectations that have moved towards deeper rate cuts or, indeed, more aggressive asset purchases of late.
The more important point is that we doubt that the ECB will exceed already dovish market expectations. We believe that the Governing Council will try not to disappoint the markets while preserving as much ammunition as possible for the future battles of the global currency war. EUR could squeeze higher more broadly after the meeting.
USD could be in for a correction as well if concerns about the impact of strong USD resurface during the Fed Chair’s speeches next week. In addition, evidence of more subdued payroll and earnings growth in November should highlight that a lot of positives are in the price of USD by now, encouraging investors to take profit.
What we’re watching:
FX Focus – More expensive USD funding rather than portfolio outflows from the Eurozone drove EUR/USD selling of late. We expect the USD to stay in demand against the CHF and JPY. Against the EUR, upside appears limited.
EUR – It may prove difficult for Draghi to exceed already elevated easing expectations. Hence the EUR may be subject to upside risk.
USD – While next week’s payrolls report is unlikely to alter Fed rate expectations, Fed Chair Yellen’s speeches on Tuesday and Wednesday should prove the bigger market driver.
AUD – Given limited room of the RBA turning less dovish on monetary policy, it should be risk sentiment that drives the currency.
CAD – The CAD should stay driven by external factors such as oil prices, which could remain supported ahead of the OPEC meeting on 4 December.
