Currency Update 30th of November

The end of last week was quiet due to Thanksgiving in the US on Thursday and an extended weekend for many. Today is the last day of November which may see some month-end flows, potentially causing upside in EURGBP. As always on Mondays I prepared the currency update to get you up-to-date with the situation in the markets.

Currency Update:

USD: The market currently prices a 72% probability for a Fed rate hike on December 16. The Fed have clearly signalled they are ready to commence the tightening cycle in December and the only information that is likely to prevent them from doing so is a move lower in underlying inflation between now and the December meeting, or some major uncertainty in financial markets. The employment situation has met the Fed’s criteria to lift rates, however they must also be confident that inflation is trending back towards 2%. Core PCE is at 1.3% and Core CPI is at 1.9%. The employment release for October, released November 6, came in much better than expected across all three major components which increased expectations for a December move. 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%. Core PCE for October showed zero inflation, while the y/y figure remained at 1.3% for the third consecutive month. This should provide solid arguments for dovish FOMC voters to keep rates on hold at the December 16 meeting.

EUR: The ECB have told markets they intend to re-examine QE at the December 3 meeting in light of subdued inflation. This suggests they will increase the size of QE and cut the deposit rate, with the market already pricing in a 10 basis point cut. An exclusive Reuters interview with four anonymous governing council members suggests that the ECB is likely to cut the deposit rate by at least 10 basis points in December.

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.

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 has been excellent with the October figure showing a gain of nearly 60,000 jobs and the unemployment rate moving down to 5.9%. Private Capital Expenditure for Q3 was a big disappointment printing at -9.2%.

NZD: The RBNZ is likely to cut rates again in the medium term, with the market pricing a nearly 50% chance of a cut on December 9. Dairy prices have declined the the past two months, and third quarter data for both employment and inflation were much worse than expected.

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. Japan showed a technical recession with Q2 and Q3 GDP in contraction. 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. With the ECB planning further QE and a rate cut, we will likely see an adjustment of monetary policy from the SNB on December 10, to compensate for whatever action the ECB may have announced one week prior, in an attempt to raise the EURCHF exchange rate.

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