Intro
The yen remains a volatile currency – one week, it’s really up, and the next, it’s really down. It will be interesting to see how it behaves this week with the upcoming interest rate decision. Speaking of which, all three of the recent interest rate events
Other weak currencies were the New Zealand dollar and the Swiss franc, aligning with their fundamentals.
Let’s explore if our sentiments for the major currencies have changed in our latest report.
Market Overview
Here is a brief fundamental report for all major currencies.
US Dollar (DXY): Bearish
Due to the latest Consumer Price Index (CPI) and Non-Farm Payrolls (NFP prints), markets remain bearish on the dollar. The base case is still one more rate cut this month (of at least 25 basis points/bps or 0.25%).
The probability has jumped from 71% last week to 88%. Diarise the new US interest rate event on Wednesday.
In the long term, the Fed is determining how far and fast it should cut rates to achieve a 2% inflation rate.
Euro (EUR): Bearish
The European Central Bank (ECB) cut the interest rate last week as they did in October. They also removed the ‘sufficiently restrictive’ language, so we should expect more cuts next year.
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. Other contributing factors to a pressured euro are bumpy French politics and the prospect of a German snap election.
British Pound (GBP): Bearish
The Bank of England (BoE) cut their interest rate from 5% to 4.75% as anticipated. However, the result expected in the bank’s next meeting this Thursday is a hold (90% chance). The reason is that inflation is still higher than desired, giving GBP a little lift.
Still, the BoE has indicated they need to be restrictive and a “gradual approach” to policy easing.
Besides Thursday’s event, keep an eye out for the year-on-year inflation for the pound a day prior.
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.
This means the Bank of Japan (BoJ) is expected to hike the interest rate this Thursday. Another reason markets feel this way is Governor Ueda saying 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 monitor 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) cut its interest by 50 bps to 4.25% as expected recently. It also signalled further reductions while remaining confident 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 last week. 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). Watch out for the new year-on-year CAD inflation rate on Tuesday.
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 last week. 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 CHF’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%).
