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USD unwinds ahead of Fed meeting - Other Central Banks - Encouraging Chinese data

USD unwinds ahead of Fed meeting

(Yann Quelenn, market analyst)

 

Since the OPEC meeting crude oil has been pushing largely higher, as has the greenback. Strong oil prices are supporting inflation expectations as well as the Fed rate hike coming this week. We believe that the dollar is likely to lose ground amid the Fed meeting, as the Fed will be cautious. We continue to believe that this hike will be done to save Fed’s credibility and that the American central bank is likely to let inflation run for some time in order to kill the massive debt. Currency-wise, markets are pricing a 100% likelihood of a rate hike and as we think that there is no clear incentive to remain long dollar at the moment, the downside risk on the greenback is clearly significant.

 

Other Central Banks

(Peter Rosenstreich, head of market strategy)

 

Apart from the Fed there are a number of central bank meetings this week which will cause FX trading to shift into a consolidation pattern, while the stretch long position in USD is expected to be paired back. The market has now priced in five 25bp Fed fund rate hikes by the end-2018 including Wednesday’s rate increase. Given our expectations for a single rate hike in 2017, we see this forecast as overdone. Since much of the Fed tightening cycle is already priced into the USD we suspect that further extensive appreciation is unlikely. In our view, it is unlikely that in the event that the Fed increases policy rates by 150bp, that other G10 central banks will retain a dovish bias. A monetary policy shift at the BoJ specifically should shift capital flows. In Mexico, Banxico is expected to raise rates 50bp (market expected 25bp) alongside the Fed. As the MXN depreciates and volatility decelerates Banxico should take the opportunity to get ahead of the curve with a larger-than-expected rate hike. The Russian central bank is not expected to change its policy rate at 10.0%. Overshadowed by the Fed, the BoE is expected to keep monetary policy unchanged as strong post Brexit, domestic economic data has encouraged policy makers. GBP got a bump on comments from Phillip Hammond over the outlook for an interim agreement with Brussels as Brexit negotiations take place. Today’s inflation data as headline is expected to rise 1.1% from 0.9% in October. The rally in inflation will cement no change ahead of Thursday’s MPC meeting and further push GBP higher. We remain constructive on GBPUSD with a support located at 1.2573 and with a bullish extension expected to last until 1.2780 (100d MA).

 

Encouraging Chinese data keeps flowing 

(Arnaud Masset, market analyst)

 

The Chinese renminbi was better bid against the USD this morning amid the publication of solid monthly data from China that points to a stabilisation of the world’s second largest economy. USD/CNY eased to 6.90 in overnight trading compared to yesterday’s close of 6.9068. Retail sales surprised substantially to the upside with the measure printing at 10.8%y/y in November versus 10.2% median forecast and 10% in the previous month. Industrial production came in also above consensus as it expanded 6.2%y/y, beating expectations of 6.1%. Finally, fixed asset investment remained stable at 8.3%y/y, confirming the consolidation initiated earlier this summer. However, this encouraging data should be taken with a grain of salt as state-owned business and infrastructure projects remained the biggest contributor (+20.2%y/y) while private investment companies’ investment grew 3.1%y/y. The trend is however changing in the right direction with the first decreasing steadily since April this year, while the latter has moved upward from a low of 3.10% in July.

 

All in all, the recent data from China suggests that the efforts of the central bank together with the government are finally showing some results. However, we still believe it is a relatively premature to celebrate a win for China’s economy which is on a constant fix of government support. Therefore, we feel that there is some room for some yuan appreciation. Indeed, the debasement of the yuan throughout 2016 has given the economy a positive boost to and is helping the industrial sector to hold ground.

Tuesday, 13 Dec, 2016 / 10:21

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