USD strength has been the over-riding tone in the market, here are thoughts form HSBC:
“..our fixed income team now expects US rates to remain elevated, at least in the coming months. This will also provide some support for the USD..”
“..The EUR’s own political challenges will put downward pressure on the currency in the near-term. But we believe that to take a long-term bearish view on the currency, one needs to believe the Eurozone is going to break up. We do not hold this as a base case view..”
“..We see EUR-USD at 1.05 at the end of 2016 but then see a gradual rise to 1.10 through the course of 2017…”
The over-riding market sentiment is that currency direction is due to political factors vs underlying fundamentals, a prime example being:
“..NOK and SEK will see their structural strengths challenged by ongoing fears about the European project..”
In Oct16, China’s currency reserves dropped to the lowest since Mar11, as it strives to prevent CNY depreciating against other currencies. Since Trump was elected, the USD has surged and USD/CNY has slumped, despite Chinese Central Bank efforts – propelled by the possibility that Trump imposes barriers to Chinese imports. There is a chance that Chinese authorities allow CNY depreciation if overall global growth prospects decrease.
This has repercussions for AUD and NZD, which have both traded higher vs CNY, helping to create deflationary pressures in both countries, and fueling the prospect of rate cuts (or at least targeted weaker currency) in both Australia and New Zealand. Market forecasts all point to lower AUD and NZD in the medium term.
This Wednesday sees UK Chancellor Hammond give his economic & fiscal outlook, and the market thinks GBP may be vulnerable to a slight correction after recent bouts of strength. Everyone is waiting for indications of a ‘hard’ or ‘soft’ Brexit. Hammond has been clear in his desire to increase spending, but may find it had to cut taxes, leaving him with a tricky balancing act, that will become clearer on Weds.
This week ends with Thanksgiving Holidays, and today has been relatively lackluster in terms of direction. The main market movers will be EUR this afternoon, USD on Wednesday pm and GBP on Friday. The big movers are:
Monday pm: ECB President Draghi – sure to move markets in a wide-ranging policy speech
Tuesday am: Australian Central Bank data & speakers
Wednesday pm: FOMC Minutes of Interest Rate meeting, following Durable Goods & oil inventory data
Thursday: German GDP and IFO Business Climate
Thursday pm: NZD trade data
Friday: UK GDP quarterly data (high-impact, data after Brexit)