Currency Update 14th of December

There is no trade call for the session as it is Monday and we have an empty economic calendar. As always on Mondays I prepared the currency update to get you up-to-date with the situation in the markets.

Currency Update:

USD: CME Group FedWatch Fed Funds futures implies an 79% probability of rate hike on December 16. The Fed have clearly signalled they are ready to commence the tightening cycle in December and the market has all but priced it in. The employment situation has met the Fed’s criteria to lift rates, and Yellen has stated that the strong employment situation has given her confidence about inflation. Core PCE is at 1.3% and Core CPI is at 1.9%. The employment release for October and November was solid, both above 200k jobs added. However wage growth remained at 0.2% m/m and 2. The FOMC statement and related minutes for the October meeting were hawkish and showed that the majority of Fed members see conditions likely warrant a rate rise at the next meeting. Annualised GDP for Q3 is at 2.1%.

EUR: The euro continues to be one of the weaker major currencies fundamentally due to the active easing cycle by the ECB. The central bank continued to tell markets they intended to re-examine QE at the December 3 meeting in light of subdued inflation. On December 3 the ECB cut the deposit rate by 10 bps as was expected, however what the central bank would do with it’s current QE program was always going to be more significant. Concerning the QE program, despite all the hype, the news was clearly at the less aggressive end of market expectations. Particularly the fact that there will be no increase in the €60 billion/month asset purchase program. The earliest cut-off date for the program was also extended from September 2016 to March 2017.

GBP: Sterling remains a strong currency in the long term, however the recent Quarterly Inflation Report prompted the market to push back the timing of the first rate hike due the the BOE admitting that inflation is likely to remain subdued for longer then previously anticipated. CPI inflation is now expected to remain below 1% until the second half of 2016. Wage growth however has been excellent near 3% for several months, which is supportive for GBP. On December 10, the BOE kept rates on hold as was expected, there was no change to the bank rate votes, and QE remained steady at Stg 375 b. The minutes leaned to the dovish side showing that other than ultra hawk Ian McCafferty, there is no support for early tightening with the economic scenario at home and globally.

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. Private Capital Expenditure for Q3 was a big disappointment printing at -9.2%. On December 1 the RBA left rates unchanged at 2.00%, and did very little to change any language in the statement. The message was basically the same, the RBA sees signs of improvement in the non-mining economy, but accepts that with inflation low, there is scope to lower interest rates further in the future. There was no jawboning the AUD lower, and it said only that the currency “is adjusting to the significant declines in key commodity prices.” On December 2, September quarter gross domestic product beat expectations printing at 0.9% on the quarter and 2.5% for the y/y. The previous q/q figure was also revised slightly higher to 0.3% from 0.2%, and the previous y/y revised slightly lower to 1.9% from 2.0%. The employment situation has been excellent with both the October and November figures showing stellar gains of 58,000 and 71,000 jobs added respectively and the unemployment rate moving down to 5.8%.

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. Q3 data for both employment and inflation were much worse than expected, and dairy prices declined 3 out of the past 4 prints. On December 1 the GDT Index did see a small gain of 3.6%, it’s first increase after 3 consecutive declines.

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. On December 7 Japan’s Final GDP for Q3 beat expectations when it was revised higher to 0.3% from the first estimate of -0.2%, and better than the consensus 0.1%. CPI excluding food & energy: Nationwide, 0.70% for October y/y, down from a prior of 0.90%; Tokyo-area, 0.60% for November, up from a prior of 0.40%. The BOJ’s own measure, 1.20% for October.

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. On December 10, despite some speculation that the central bank would respond to recent ECB actions, the SNB kept rates on hold as was widely expected. The bank reiterated their usual stance that the franc is overvalued and they remain active in FX. interventions.

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