We have no trade call for the session as it is Monday and there is no tier 1 data due up. Start your week off on the right foot by reading my currency update below.
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 November, released on December 4, was once again solid. While wage growth leaves something to be desired at 0.2% for the month and 2.3% y/y (down from 2.5%), payrolls once again beat expectations printing at 211K with an upward revision to October’s already much better than expected print, now placing it at an impressive 298K. The unemployment rate remained steady and low at 5.0%, and the participation rate nudged higher to 62.5% 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 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.
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%. 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%.
NZD: The RBNZ is likely to cut rates again in the medium term, with the OIS market pricing a 44% chance of a cut on December 9, and 16 out of 18 Bloomberg analysts seeing a 25 bps cut. 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. 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.
Source:: Currency Update 7th of December