We will use Monday’s London session to assess direction in the market and keep a very close eye on risk sentiment for a potential trade. Familiarize with the latest changes in the market by reading my currency update bellow.
USD: The dollar continues to be our strongest fundamental currency over the medium term. On December 16, the Fed raised its short-term borrowing rate 25 basis points to a range of 0.25% -0.50%. The vote was a resounding 10-0 in favor of the hike. The accompanying statement was relatively upbeat focussing on the marked improvement in the labour market. The Committee plans to assess incoming information with regards to future hikes, and stressed that tightening would be a gradual process, with approximately 3-4 further hikes expected during 2016. FOMC minutes from the December meeting showed there was some hesitation about raising rates and that some members are concerned about inflation remaining subdued. Employment for December was again stellar at nearly 300k jobs gained, however the increasingly more important Average Hourly Earnings was flat, which dampened bullishness in the buck.
EUR: The euro continues to be one of the weaker major currencies fundamentally due to the active easing cycle by the ECB. On December 3 the ECB cut the deposit rate by 10 bps as was expected, however contrary to expectations the bank did not expand the size of QE, which disappointed the market and saw euro rally. CPI for December missed expectations with the core at 0.9% y/y and headline at 0.2%. Failure to see a move higher in EZ inflation will keep pressure on euro.
GBP: Sterling remains a strong currency in the long term, however the currency has seen weakness in recent weeks as the exchange rate is repriced for a later liftoff date due to subdued inflation.
AUD: The Australian dollar is a neutral currency while the RBA remain on hold. The central bank is unlikely to cut interest rates until they see Q4 inflation data, which is not released until January 27. The RBA will remain on hold in February if inflation is not of concern. The employment situation in Australia has been excellent in the latter half of 2015, despite a slowdown in the mining sector.
NZD: The RBNZ cut rates for the fourth time in 2015 at the December 10 meeting but moved to a more neutral stance in their statement which supported Kiwi. Dairy prices will be an important factor for the Kiwi going forward.
CAD: The Canadian dollar is relatively neutral at present both fundamentally and sentiment-wise. There remains a possibility that the BOC will cut rates in 2016, however in the medium term, CAD direction will be a function of supply and demand of WTI.
JPY: The Japanese economy has failed to show any meaningful signs on recovery since the massive QQE program was implemented. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend. If underlying inflation does not pick up then the BOJ may have to increase the size of its QQE program yet again. The BOJ’s own measure of underlying inflation is at 1.2%, with a target of 2%.
CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB.