Intro
Yes, the yen was (as usual) the focal point of last week, thanks to a historic rate hike by the Bank of Japan. It enjoyed 1-2% boosts against many currencies. The dollar was also strong, beating the likes of AUD, NZD and EUR.
Our sentiment biases remain unchanged from last week. However, we should pay particular attention to the US dollar and the British pound.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (DXY): Bearish
The Fed delivered a rate hold on Wednesday (as anticipated).
Since it’s the start of the month, we should expect considerable volatility for the USD. The Nonfarm Payrolls and unemployment rate are scheduled for release. Whether job growth is worse or stronger than expected, the Fed remains a largely dovish central bank.
Key news to watch: unemployment rate and Nonfarm Payrolls on Friday.
Euro (EUR): Bearish
The European Central Bank (ECB) cut the interest rate last month and removed the ‘sufficiently restrictive’ language. So we should expect more cuts in 2025. Economic forecasts are downgraded, suggesting slowing momentum (another negative for the euro).
The threat of a fresh trade tariff with Trump is hugely influential and may cause the euro to be sold off on tariff fears.
Key news to watch: Inflation Rate YoY Flash on Monday
British Pound (GBP): Bearish
The Bank of England (BoE) recently held the interest rate at 4.75%. However, there is a 87% probability they will cut it by 0.25% on Thursday. The vote cut around the announcement will signal whether the central bank will move into an aggressive easing cycle.
So, the likelihood is high for sustained downward pressure for the pound, especially against EUR and USD.
Key news to watch: Official Bank Rate on Thursday.
Japanese Yen (JPY): Bullish
The fundamentals are largely bullish for the yen. Tokyo’s CPI rose above forecasts last month. Also, Japan’s base salaries have increased above expectations.
However, the Bank of Japan (BoJ) did not hike the interest rate on Dec 19 as it was predicted.
Previously, Governor Ueda said they couldn’t keep interest rates too low for too long in December (as this would accelerate inflation). Well, the BoJ delivered a 25-basis-point hike to 0.5%, the highest level since October 2008!
In the long term, we should also keep an eye on US Treasury yields – rising yields = lower JPY, while lower yields = higher JPY.
Australian dollar (AUD): Neutral
‘Unchanged’ should be the Reserve Bank of Australia (RBA)’s middle name. It’s the ninth time in a row they have kept the interest rate the same at 4.35%.
Growth remains weak, with GDP at 0.8% y/y, while the labour market shows gradual easing and wages slowing. The RBA has also emphasised that policy will remain restrictive until inflation moves toward its target.
Always keep in mind the Australian dollar is procyclical, with particular exposure to China’s geopolitics. Trump’s recent win in the US election means the prospect of trade tariffs with China has increased (potentially causing headwinds for AUD).
New Zealand dollar (NZD): Bearish
The Reserve Bank of New Zealand (RBNZ) recently cut its interest rate by 50 bps to 4.25%, as expected. The RBNZ also signalled further reductions while remaining confident that inflation will remain in the target zone.
In the last RBNZ meeting, Governor Orr indicated that a 50 bps cut in February 2025 is possible. Given potential trade tariff issues between China and the United States, we can rule out a rate hike.
Canadian dollar (CAD): Bearish
The Bank of Canada’s language and the country’s economy of late aligns with a bearish sentiment. Despite having inflation under control, economic challenges persist, as shown by weak sentiment in the BoC’s recent Business Outlook Survey.
The markets had previously priced an 80% chance of a rate cut last week. However, the central bank surprised everyone with a hold.
Key news to watch: unemployment rate on Friday.
Swiss Franc (CHF): Bearish
The Swiss National Bank (SNB) delivered another 25 bps rate cut a few weeks ago. Given the modest economic growth, the central bank is prepared to intervene in the forex market to maintain a stable Swiss franc.
Always look at geopolitical tensions (like the current Russia/Ukraine crisis) that can affect the currency’s value.
In the long run, the bearish sentiment remains. The new SNB chairman is more keen to cut rates than the last chairman, with the SNB aiming for neutral rates between 0-0.5% (currently at 0.5%).
