Intro
With the holiday break fever pretty much over, the FX market is as vibrant as ever. The biggest losers in the past week included GBP, AUD, and NZD, against the biggest winners like CAD and USD.
As usual, our sentiment biases for each major currency remain the same, and we expect an uneventful week.
Market Overview
Here is a brief sentiment report for all major currencies.
US Dollar (DXY): Bearish
The Fed surprised analysts by delivering a rate hold in December (where a 0.25% cut was predicted. However, the Non-Farm Payrolls and unemployment rate releases came out better than expected last Friday, giving USD a lift.
Key news to watch: Inflation rate figures (various) 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.
Key news to watch: Inflation Rate YoY Final on Friday.
British Pound (GBP): Bearish
As expected, the Bank of England (BoE) recently held the interest rate at 4.75%. Year-on-year inflation is still higher than desired (rising from 2.3% to 2.6%), which could lift GBP despite the overall bearish bias.
The BoE has also indicated they need to be restrictive and a “gradual approach” to policy easing.
Key news to watch: GDP figures (various) on Thursday.
Japanese Yen (JPY): Bullish
Despite some volatility on the charts, the fundamentals are 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 was predicted. Still, Governor Ueda has said they can’t keep interest rates too low for too long last month (as it would accelerate inflation).
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).
Key news to watch: Unemployment rate on Thursday.
New Zealand dollar (NZD): Bearish
The Reserve Bank of New Zealand (RBNZ) cut its interest by 50 bps to 4.25% as expected recently. It also signalled further reductions while having confidence that inflation will remain in the target zone.
Governor Orr indicated in the last RBNZ meeting that a 50 bps cut in February 2025 is possible. So, we can rule out a rate hike, more so with potential trade tariff issues between China and the United States.
Canadian dollar (CAD): Bearish
The Bank of Canada (BoC) unsurprisingly delivered a 50 bps cut several weeks ago. Their language also indicates potential further cuts, depending on economic data. Like other banks, inflation is key for the central bank. They are, so far, getting it lowered (a positive).
Besides inflation, keep an eye on oil prices, which share a positive correlation – lower/higher oil prices = lower/higher CAD.
Swiss Franc (CHF): Bearish
The Swiss National Bank (SNB) delivered another 25 bps rate cut a few weeks back. Economic growth is modest. With this in mind, 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%).
