Intro
Yes, the yen was (as usual) a highly volatile currency in the past week despite no significant related news. The Bank of Japan’s historic rate hike a week earlier spurred the bullish move.
CAD also dominated against many currencies as its unemployment rate decreased slightly on Friday.
Our sentiment biases remain unchanged from last week. However, we should pay particular attention to the US dollar, the British pound, and the Swiss franc.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (DXY): Bearish
The USD is fundamentally bearish due to the Fed’s recent hate hold and lower Nonfarm Payrolls on Friday (although the employment rate improved slightly). The Consumer Price Index (CPI) report is the most crucial event for the dollar, and it will influence the Fed’s policy going forward.
A positive or higher-than-expected figure (which is the likely outcome) would mean the Fed will probably maintain higher interest rates longer, delaying cuts. Of course, the opposite is true.
Key news to watch: CPI on Wednesday.
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.
British Pound (GBP): Bearish
Last week, the Bank of England (BoE) delivered an unsurprising 0.25% rate cut, reinforcing the bearish bias surrounding the British pound.
Economic growth is the UK’s key focus area this week with the pending Gross Domestic Product (GDP) prints. The expectation of positive figures can provide short-term support for the currency and delay the need for rate cuts.
Key news to watch: GDP on Thursday.
Japanese Yen (JPY): Bullish
The fundamentals are largely bullish for the yen. 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 recently 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’s (RBA) 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 that 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 a few weeks ago. However, the central bank surprised everyone with a hold.
Swiss Franc (CHF): Bearish
The Swiss National Bank (SNB) cut the rate by another 25 bps last month. 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 and 0.5% (currently at 0.5%).
Key news to watch: Inflation Rate YoY.
