USD/JPY ends 2015 above 120 yen, EUR/USD weak at 1.08

The US dollar firmed against nearly all the major currencies in the last week of 2015. The exceptions were the Antipodean currencies and the Japanese yen. The relatively high short-term yields offered by Australia and New Zealand may have attracted some flows. The yen’s gains were all scored on New Year’s Eve in thin turnover, as equity markets and US yields slipped lower.

The euro has spent the month since the ECB meeting consolidating in a $1.08-$1.10 trading range. It has made two serious efforts to break to the topside but has been rejected both times. The euro finished 2015 below its 20-day moving average for the first time since December 2.

The dollar had a heavy tone against the yen and the greenback has spent the entire last week of the year below a trend line drawn off the August spike (~JPY116.20) and the mid-October low (~118.00). At the end of next week, it was found near JPY121. But the fundamentals offer an important caveat against getting too bullish on the yen. The Japanese economy continues to struggle despite the hyper-aggressive monetary policy and a budget deficit of 6.5% of GDP. Reports that the BOJ will lower its FY2016 CPI forecast, after announcing operational adjustments a few weeks ago, can only fan expectations of further QQE in the year ahead.

Sterling fell 5.3% against the US dollar in 2015. A little more than 40% it was recorded in December. Expectations for a BOE rate hiked have are into H2 16, and an economy that appears to be losing some momentum have weighed on sterling. The US-UK 2-year spread favored the former by a nine-year high 46 bp in the last week of the year.

The UK budget deficit is overshooting, and the first budget of the Tory’s majority government was somewhat less austere than many anticipated, given the rhetoric. This, coupled with an easy BOE stance, is not a policy mix often associated with a stronger currency. Sterling finished last week at its lowest level since April. Sterling hit a low near $1.4565 in April and then made a spectacular recovery in two months to reach $1.5930. However, it has been trending lower since, and there is nothing in the technical condition that suggest sterling’s has neared a significant bottom. A test on the April lows seems likely, and a break could spur another 2% decline to bring it to the 2010 low near $1.4230.

The Canadian dollar is the worst performing major currency in 2015, depreciating 16% against the US dollar. It has been dragged down by the Bank of Canada rate cuts, and arguably the anticipation of another one in 2016, widening discount to the US on two-year borrowings, and the drop in oil prices. There may be some support near CAD1.3730 on its way toward CAD1.3660.

The Australian dollar: For the last third of 2015, the Aussie traded in a $0.7000-$0.7400 trading range but has not closed below $0.7100 since mid-November. It had a good run in over the last couple of weeks, moving from the lower end its range to the upper end, reaching almost $0.7330 at the end of last week.

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Source:: USD/JPY ends 2015 above 120 yen, EUR/USD weak at 1.08

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