The Week Ahead: Hawkish Fed, and Global Uncertainty Fuel USD Dominance
What to buy; what to sell...(corrected version)
Report updated on Tuesday, January 14th to correct previous errors.
Tuesday, January 14, 2025, Week 3
USD (Very Strong - Very Bullish): The Fed's hawkish stance, robust US economic data, and safe-haven demand amid global uncertainties underpin the dollar's strength. The potential for fiscal stimulus under the incoming Trump administration adds further support, solidifying its position as the strongest currency. (Rating: No change since the previous report).
JPY (Strong - Bullish): Expectations of a BOJ policy shift towards normalization, fueled by persistent inflation and a moderately recovering economy, are driving the Yen higher. This is a significant shift, marking a potential turning point for the JPY. (Rating: No change since the previous report).
CHF (Strong - Moderately Bearish): The Swiss Franc retains its safe-haven appeal despite the SNB's recent rate cut, benefiting from global uncertainties. However, the SNB's dovish stance and potential for further easing create a moderately bearish outlook, suggesting limited upside potential. (Rating: Downgraded from Moderately Bullish since the previous report).
CAD (Weak - Bearish): The Canadian Dollar is weighed down by the BoC's dovish stance, concerns about slowing economic growth, political uncertainty following Trudeau's resignation, and the potential impact of US trade policies. The combination of these factors creates a challenging environment for the CAD. (Rating: Downgraded from Moderately Weak since the previous report).
AUD (Weak - Bearish): The Australian Dollar faces headwinds from a cautious RBA, weak domestic data, concerns about the Chinese economy, a key trading partner, and a stronger US dollar. These factors contribute to a bearish outlook for the AUD. (Rating: No change since the previous report).
EUR (Weak - Bearish): The Euro remains under pressure due to the ECB's dovish stance, political uncertainty in Germany and France, and a broadly stronger USD. The Eurozone's economic challenges and political instability continue to weigh on the currency. (Rating: No change since the previous report).
GBP (Weak - Bearish): The British Pound is weighed down by the BoE's cautious approach, sluggish economic growth, persistent inflation, and uncertainty surrounding the new Labour government's policies. The combination of these factors creates a challenging environment for the GBP. (Rating: No change since the previous report).
NZD (Very Weak - Very Bearish): The New Zealand Dollar is struggling amidst a confirmed technical recession, aggressive RBNZ easing, and external headwinds. The economic downturn and the central bank's dovish stance create a very bearish outlook for the NZD. (Rating: No change since the previous report).
USD: Very Strong - Very Bullish
The US Dollar (USD) maintains its very strong and very bullish outlook, underpinned by a hawkish Federal Reserve, a resilient US economy, and safe-haven demand amid global uncertainties. The Fed's decision to cut rates to 4.50% in December was accompanied by signals of a cautious approach to future adjustments, with the market now pricing in a slower pace of easing in 2025. The Fed's revised economic projections indicate a median projection for the federal funds rate of 3.9% by the end of 2025, higher than previously anticipated. This hawkish tilt, contrasting with the easing biases of other major central banks, has driven significant USD strength. The robust December jobs report, which exceeded expectations with 256,000 jobs added and an unexpected drop in the unemployment rate to 4.1%, further reinforced the Fed's stance. These figures highlight the resilience of the US labor market and reduce the urgency for immediate rate cuts. An emerging theme is the uncertainty surrounding the trade and fiscal policies of the incoming Trump administration. While initial reports suggested a potentially less aggressive approach to tariffs, President-elect Trump later denied these claims, reaffirming his commitment to a tougher stance on trade. This has injected volatility into the markets, with the USD initially weakening on the softer tariff news before rebounding on Trump's denial. The potential for increased tariffs on goods from China, the EU, Mexico, and Canada is a significant concern for traders, as it could fuel inflation and disrupt global trade flows. Additionally, Trump's campaign promises of increased infrastructure spending and tax cuts are creating uncertainty about the inflation outlook and the Fed's future policy path. The interplay between these domestic and external factors, along with the upcoming release of the FOMC minutes and key economic data, will be crucial in determining the USD's trajectory in the coming weeks.
Inter-markets (Previous Ten Days)
US stock markets experienced volatility during the week. The S&P 500 and Nasdaq initially rallied on Monday, driven by a surge in tech stocks. However, on Tuesday, stocks fell sharply after stronger-than-expected jobs data fueled concerns that the Fed might delay rate cuts. US Treasury yields surged during the week, with the 10-year yield reaching an eight-month high of 4.73% on Wednesday before stabilizing around 4.68% on Thursday. Oil prices (WTI crude) were volatile, initially rising on expectations of increased demand due to cold weather but later retreating as a stronger US dollar weighed on the commodity.
Currency (Previous Ten Days)
The US Dollar Index (DXY) strengthened during the week, reaching a 25-month high above 108. The dollar's gains were driven by the Federal Reserve's hawkish stance, robust economic data, and safe-haven demand amid global uncertainties. The stronger-than-expected jobs report on Friday, January 10th, further bolstered the dollar. The DXY was trading around 109.6522 on Friday, January 10th.
Upcoming Economic Indicators (Next Ten Days)
January 15:
US Core Inflation Rate MoM (Dec 2024): Forecast at 0.20%. A reading in line with or below expectations could reinforce the view that inflation is moderating, potentially tempering the Fed's hawkishness and weighing on the USD. A higher-than-expected reading could further strengthen the USD.
US Core Inflation Rate YoY (Dec 2024): Forecast at 3.30%. Similar to the MoM figure, a reading in line with or below expectations could ease concerns about persistent inflation, while a higher reading could add to them.
US Inflation Rate MoM (Dec 2024): Forecast at 0.30%. The market will be looking for signs of easing inflationary pressures. A lower-than-expected reading could slightly weaken the USD, while a higher reading could strengthen it.
US Inflation Rate YoY (Dec 2024): Forecast at 2.80%. Similar to the MoM figure, a lower reading could ease inflation concerns, while a higher reading could reinforce the Fed's hawkish stance.
January 16:
US Retail Sales MoM (Dec 2024): Forecast at 0.50%. Strong retail sales data would reinforce the narrative of a robust US economy, potentially supporting the USD. A weaker-than-expected reading could raise concerns about consumer spending and weigh on the currency.
January 17:
US Building Permits Prel (Jan 2025): Forecast at 1.48M. A higher-than-expected figure would indicate strength in the housing market, potentially supporting the USD.
US Housing Starts (Jan 2025): Forecast at 1.32M. Similar to building permits, strong housing starts data would be positive for the USD.
January 23:
US S&P Global Composite PMI Flash (JAN): A reading above 50 indicates expansion in the private sector. Strong PMI figures could further boost the USD by suggesting continued economic growth.
US S&P Global Manufacturing PMI Flash (JAN): A reading above 50 indicates expansion in the manufacturing sector. Strong PMI figures could further boost the USD by suggesting continued economic growth.
US S&P Global Services PMI Flash (JAN): A reading above 50 indicates expansion in the services sector. Strong PMI figures could further boost the USD by suggesting continued economic growth.
January 24:
US Existing Home Sales (Dec 2024): A strong reading could further boost confidence in the housing market and the broader economy.
Trading Thesis: The USD remains a strong buy candidate based on the Fed's hawkish policy divergence, robust economic data, and the potential for fiscal stimulus. As a rule of thumb, "when in doubt, buy dollars" remains relevant, especially during periods of global uncertainty.
CAD: Weak - Bearish
The Canadian Dollar (CAD) is currently experiencing a bearish trend, characterized by a weak fundamental rating and negative market sentiment. The currency is under pressure due to a combination of a dovish Bank of Canada (BoC), slowing economic growth, and political uncertainty following Prime Minister Trudeau's unexpected resignation. The BoC's recent 50 basis point rate cut, bringing the policy rate to 3.25%, and the market's anticipation of potential further easing in early 2025 are contributing to the CAD's weakness. The weaker-than-expected Q3 2024 GDP growth of just 1% annualized and a rise in the unemployment rate to 6.8% in November have added to the complexity of the BoC's policy decisions. The CAD has weakened past 1.44 per USD, approaching its lowest level since March 2020.
Over the past six weeks, the CAD has been one of the weakest-performing major currencies, driven by the BoC's dovish stance and concerns about the Canadian economy. In the past ten days, the CAD's decline has accelerated, influenced by Trudeau's resignation and renewed concerns about US trade policy under the incoming Trump administration. Looking ahead to the next ten days and six weeks, the CAD is likely to remain under pressure. The interplay between BoC policy, economic data releases, and geopolitical developments will be crucial in determining the currency's trajectory. The market will be particularly attentive to any signs of a shift in the BoC's policy stance or changes in the political landscape following Trudeau's departure.
Inter-markets (Previous Ten Days)
The TSX showed mixed performance, initially rising on the back of the BoC rate cut and positive sentiment surrounding the energy sector. However, it later pared some gains due to weaker commodity prices and broader market uncertainty. Canadian government bond yields experienced some volatility, with the 10-year yield initially rising above 3.45% on political uncertainty and rising deficit concerns. Oil prices (WTI crude) were volatile, initially rising on expectations of increased demand due to cold weather but later retreating as a stronger US dollar weighed on the commodity.
Currency (Previous Ten Days)
The CAD weakened during the week, pressured by domestic political uncertainty, the BoC's dovish stance, and a stronger USD. The USD/CAD pair moved past 1.44, with the CAD hitting multi-year lows. The COT report as of December 31, 2024, indicated a bearish bias among institutional investors towards the CAD.
Upcoming Economic Indicators (Next Ten Days)
January 16:
CA BOC Gov Macklem Speech: Traders will scrutinize Macklem's comments for any hints about the BoC's future policy direction, particularly in light of Trudeau's resignation and the uncertain economic outlook. Any dovish signals could further weaken the CAD.
January 21:
CA Inflation Rate YoY (Dec 2024): Forecast at 1.80%. A reading below the BoC's 2% target could reinforce expectations of further easing, putting downward pressure on the CAD. A higher-than-expected reading might provide temporary support, but the overall bearish outlook is likely to prevail.
Trading Thesis: The CAD remains a sell candidate due to the BoC's dovish stance, weak economic data, political uncertainty, and the potential for further rate cuts. The maxim "sell the rallies" is particularly relevant for the CAD in the current environment.
GBP: Weak - Bearish
The Pound Sterling (GBP) is currently facing a bearish outlook, characterized by a weak fundamental rating and negative market sentiment. The Bank of England's (BoE) cautious monetary policy stance, coupled with concerns about sluggish economic growth and persistent inflation, is weighing on the currency. The BoE maintained its benchmark interest rate at 4.75% in its December 2024 meeting, but the surprising split vote, with three members favoring a rate cut, signaled a potential shift towards a more dovish stance in 2025. This has fueled speculation about potential rate cuts, with the market now pricing in a greater chance of a cut in the first half of 2025. The weaker-than-expected economic data, including the contraction in monthly GDP for October and the decline in the BRC Retail Sales Monitor for November, further add to the bearish sentiment.
Over the past six weeks, the GBP has been one of the weakest-performing major currencies, driven by the BoE's cautious approach and concerns about the UK's economic outlook. The GBP/USD has fallen to a 13-month low, reflecting this negative sentiment. In the past ten days, the GBP's decline has accelerated, influenced by a combination of weak domestic data, the BoE's dovish signals, and a broadly stronger US dollar. The potential impact of the new Labour government's policies, particularly regarding fiscal spending and their implications for inflation, is also being closely watched by the market. Looking ahead to the next ten days and six weeks, the GBP is likely to remain under pressure. The interplay between BoE policy, economic data releases, and the evolving political landscape will be crucial in determining the currency's trajectory.
Inter-markets (Previous Ten Days)
The UK stock market (FTSE 100) experienced mixed performance. UK government bond (gilt) yields surged, with the 10-year yield rising to 4.84%, its highest level since 2008.
Currency (Previous Ten Days)
The GBP weakened significantly, falling to a 13-month low of $1.2206 against the USD. This decline was driven by the BoE's cautious stance on interest rates, sluggish economic growth, persistent inflation, and a stronger USD. The COT report as of December 31, 2024, indicated a bearish outlook for the GBP, with Leveraged Funds significantly increasing their net short positions.
Upcoming Economic Indicators (Next Ten Days)
January 16:
GB GDP MoM (Nov 2024): Forecast at 0.20%. A positive reading could provide some temporary support to the GBP, indicating a potential rebound in economic activity. However, a weaker-than-expected figure would reinforce concerns about sluggish growth and further weigh on the currency.
GB GDP YoY (Nov 2024): Forecast at 1.50%. Similar to the MoM figure, a positive reading could provide some relief, while a negative reading would add to the bearish sentiment.
January 17:
GB Retail Sales MoM (Dec 2024): Forecast at 0.40%. A positive reading could indicate stronger consumer spending, potentially supporting the GBP. However, given the recent decline in the BRC Retail Sales Monitor, a weaker-than-expected figure is possible, which would likely put further downward pressure on the currency.
Trading Thesis: The GBP remains a sell candidate due to the BoE's cautious stance, weak economic data, persistent inflation, and the uncertain impact of the new government's policies. "Selling into rallies" remains a prudent strategy for the GBP.
EUR: Weak - Bearish
The Euro (EUR) continues to face a bearish outlook, characterized by a weak fundamental rating and negative market sentiment. The European Central Bank's (ECB) dovish monetary policy stance, with the key interest rate at 3.15% and the possibility of further easing, is the primary driver of the EUR's weakness. The Eurozone economy is showing mixed signals, with a projected growth rate of just 0.7% for 2024 and persistent weakness in the manufacturing sector, although services show some signs of recovery. Political uncertainty in key member states like France and Germany adds another layer of complexity, raising concerns about the region's ability to implement cohesive economic policies. The ongoing war in Ukraine and its impact on energy security, as well as the potential for renewed trade tensions with the US under the incoming Trump administration, further contribute to the uncertain outlook.
Over the past six weeks, the EUR has been one of the weakest-performing major currencies, driven by the ECB's dovish stance and concerns about the Eurozone's economic and political landscape. The EUR/USD has fallen to a four-week low, reflecting this negative sentiment. In the past ten days, the EUR initially strengthened on reports suggesting a potentially less aggressive approach to tariffs from the incoming Trump administration. However, these gains were short-lived, and the currency faced renewed pressure as the week progressed, with the EUR/USD falling back towards the 1.03 mark. This decline was driven by a combination of factors, including the ECB's dovish stance, weak economic data from Germany, and persistent political uncertainty in France and Germany. Looking ahead to the next ten days and six weeks, the EUR is likely to remain under pressure. The interplay between ECB policy, economic data releases, and political developments will be crucial in determining the currency's trajectory.
Inter-markets (Previous Ten Days)
European stock markets (STOXX 50, STOXX 600) showed mixed performance, with initial gains driven by a rally in the auto and tech sectors, but these gains were later pared back. European bond yields, particularly German Bunds, were on the rise, with the 10-year Bund yield climbing to 2.46%.
Currency (Previous Ten Days)
The EUR experienced significant volatility. It initially strengthened against the USD, moving above $1.04, but later faced renewed pressure, falling back towards the $1.03 mark. The COT report as of December 31, 2024, indicated a bearish outlook for the EUR, with Leveraged Funds increasing their net short positions.
Upcoming Economic Indicators (Next Ten Days)
No significant economic indicators scheduled.
Trading Thesis: The EUR remains a sell candidate due to the ECB's dovish stance, weak economic data, political uncertainty in key member states, and the divergence in monetary policy with the Fed. The maxim "sell the rallies" is particularly relevant for the EUR in the current environment.
CHF: Strong - Moderately Bearish
The Swiss Franc (CHF) presents a complex picture for Forex traders, with a strong fundamental rating but a moderately bearish sentiment outlook. The Swiss National Bank's (SNB) surprise 50 basis point rate cut in December 2024, bringing the policy rate to 0.5%, has put downward pressure on the CHF. However, the currency's traditional safe-haven status amid global uncertainties, including geopolitical tensions and the potential for renewed US-China trade disputes, continues to provide support. The SNB's substantial foreign exchange reserves and its willingness to intervene in the forex market to curb excessive CHF appreciation add another layer of complexity.
Over the past six weeks, the CHF has experienced periods of both strength and weakness. The SNB's aggressive rate cut in December initially weakened the currency, but safe-haven flows driven by global uncertainties have provided support. In the past ten days, the CHF has been influenced by a combination of factors, including the SNB's dovish stance, safe-haven demand, and mixed economic data. The slight uptick in the unemployment rate to 2.8% in December had a minimal impact, while the decline in the investors' sentiment index suggests some concerns about the economic outlook. Looking ahead to the next ten days and six weeks, the CHF is likely to be influenced by the interplay between safe-haven demand, SNB policy, and global economic developments. The market will be closely watching for any signals from the SNB regarding future policy moves, as well as any shifts in the geopolitical landscape.
Inter-markets (Previous Ten Days)
The Swiss stock market (SMI) demonstrated relative stability, reflecting the CHF's safe-haven appeal. Swiss bond yields declined, further supporting the Franc as investors sought safety. The COT report for the Swiss Franc as of December 31, 2024, showed a notable increase in net short positions held by leveraged funds, indicating growing bearish sentiment.
Currency (Previous Ten Days)
The CHF experienced periods of appreciation driven by safe-haven flows, but the SNB's dovish stance limited gains. The COT report indicated a bearish outlook, with leveraged funds increasing net short positions.
Upcoming Economic Indicators (Next Ten Days)
No significant economic indicators scheduled.
Trading Thesis: The CHF is a hold candidate, as the competing forces of safe-haven demand and SNB easing create a balanced risk-reward scenario. While the currency's safe-haven status provides support, the SNB's dovish stance and potential for further rate cuts or intervention limit its upside potential. "When in doubt, stay out" could be a prudent approach for the CHF in the current environment.
JPY: Strong - Bullish
The Japanese Yen (JPY) is currently exhibiting a strong fundamental rating and a bullish sentiment outlook. The primary driver of the JPY's strength is the increasing market expectation of a Bank of Japan (BOJ) policy shift towards normalization. Despite maintaining its key short-term interest rate at 0.25% during its December 19, 2024 meeting, the BOJ's cautious tone and the split vote, with one board member advocating for a rate hike, have fueled speculation about an imminent policy change. The market is pricing in a potential rate hike as early as the January 23-24, 2025 meeting, with a 63% probability of a 25 basis point increase. This hawkish tilt, contrasting with the easing biases of other major central banks, has made the JPY an attractive asset for investors.
Over the past six weeks, the JPY has shown significant strength, driven by the anticipation of a BOJ policy shift. The currency reached a five-month high of 150 per dollar on November 27th before experiencing some volatility. In the past ten days, the JPY initially weakened against the USD, influenced by global risk sentiment and uncertainty surrounding the BOJ's policy intentions. However, it later recovered some ground, supported by safe-haven flows and stronger-than-expected inflation data. Looking ahead to the next ten days and six weeks, the JPY is likely to remain strong, supported by the expectation of a BOJ rate hike. The upcoming release of the BOJ's Summary of Opinions on January 23rd and Governor Ueda's speech on the same day will be crucial events, providing further insights into the central bank's policy direction. The JPY's safe-haven status could also provide support amid ongoing geopolitical uncertainties and potential trade tensions.
Inter-markets (Previous Ten Days)
The Nikkei 225 index experienced volatility, influenced by global risk sentiment and uncertainty surrounding the BOJ's policy direction. Japanese government bond (JGB) yields fell, reflecting the increased demand for safe-haven assets.
Currency (Previous Ten Days)
The JPY initially weakened against the USD but later recovered some ground. The USD/JPY pair traded at 157.7570 on Friday, January 10th. The JPY's performance was sensitive to both domestic economic data and global risk sentiment.
Upcoming Economic Indicators (Next Ten Days)
January 23:
BOJ Outlook Report: This report will provide insights into the BOJ's assessment of the economic outlook and inflation, potentially influencing the JPY. A more optimistic outlook could further strengthen the JPY.
BOJ Policy Rate: The market anticipates a potential rate hike, given the BOJ's hawkish tilt and the need to address persistent inflation. A rate hike would likely lead to a sharp appreciation of the JPY. A decision to hold rates steady could lead to some JPY weakness, but the overall bullish sentiment is likely to remain.
BOJ Press Conference: Governor Ueda's comments will be closely scrutinized for any hints about the timing and magnitude of future policy adjustments. Any hawkish signals could further strengthen the JPY.
BOJ Summary of Opinions: The release of the BOJ's Summary of Opinions will provide further insights into the central bank's policy direction.
Trading Thesis: The JPY is a buy candidate based on the increasing likelihood of a BOJ policy shift towards normalization, persistent inflation, and a moderately recovering economy. The adage "buy the rumor, sell the fact" may apply here, as the market has already priced in a potential rate hike.
AUD: Weak - Bearish
The Australian Dollar (AUD) is currently facing a bearish outlook, characterized by a weak fundamental rating and negative market sentiment. The Reserve Bank of Australia's (RBA) cautious monetary policy stance, coupled with concerns about slowing economic growth both domestically and in China, a key trading partner, is weighing on the currency. The RBA maintained its cash rate at 4.35% in its December 2024 meeting, but the market is pricing in a potential rate cut in early 2025. The weaker-than-expected Q3 2024 GDP growth of 0.3% and mixed signals from other economic indicators have added to the complexity of the RBA's policy decisions.
Over the past six weeks, the AUD has been one of the weakest-performing major currencies, driven by the RBA's dovish tilt and concerns about the global economic outlook. The AUD/USD has fallen towards one-year lows, reflecting this negative sentiment. In the past ten days, the AUD initially found some support from stronger-than-expected employment data, which showed the unemployment rate unexpectedly falling to 3.9% in November. However, this positive development was overshadowed by broader concerns about the economy and the RBA's dovish stance. The AUD weakened further towards the end of the week, influenced by a resurgent US dollar and declining commodity prices, particularly iron ore and coal. Looking ahead to the next ten days and six weeks, the AUD is likely to remain under pressure. The interplay between RBA policy, economic data releases, and global commodity prices will be crucial in determining the currency's trajectory.
Inter-markets (Previous Ten Days)
The S&P/ASX 200 index was pressured by weaker commodity prices and a stronger USD, reaching a near four-week low during the week. The yield on Australia's 10-year government bond initially fell to a seven-week low before rebounding slightly, influenced by strong jobs data. Iron ore and coal prices, key Australian exports, experienced volatility and declines, respectively, weighing on the AUD.
Currency (Previous Ten Days)
The AUD weakened during the week, hovering near one-year lows. On Friday, January 10th the AUD/USD pair fell to 0.6143. The currency remained under pressure from the confluence of weak Australian GDP data, concerns about a slowdown in China's economy, and a resurgent US dollar. The COT report as of December 31, 2024, indicated a bearish outlook for the AUD, with Leveraged Funds increasing their net short positions.
Upcoming Economic Indicators (Next Ten Days)
January 16:
AU Unemployment Rate (Dec 2024): Forecast at 4.00%. A higher-than-expected unemployment rate could further weaken the AUD by increasing the likelihood of an RBA rate cut. A lower rate could provide temporary support, but the overall bearish outlook is likely to prevail.
Trading Thesis: The AUD remains a sell candidate due to the RBA's cautious stance, weak domestic data, concerns about China's economy, and the uncertain outlook for commodity prices. The adage "sell the rallies" is particularly relevant for the AUD in the current environment.
NZD: Very Weak - Very Bearish
The New Zealand Dollar (NZD) is currently facing a very bearish outlook, characterized by a very weak fundamental rating and negative market sentiment. The dominant factor weighing on the NZD is the Reserve Bank of New Zealand's (RBNZ) aggressive monetary easing policy. The RBNZ has cut the Official Cash Rate (OCR) to 4.25% in response to a confirmed technical recession, with the economy contracting by 1% in Q3 2024. The market is fully pricing in a 50 basis point cut at the RBNZ's next meeting in February 2025, and expectations are that the OCR could fall to around 3.10% by the end of 2025. This dovish stance, coupled with weak domestic demand and a stronger US dollar, has exerted significant downward pressure on the NZD.
Over the past six weeks, the NZD has been the weakest-performing major currency, driven by the RBNZ's easing bias and the deteriorating economic outlook. The NZD/USD has fallen to two-year lows, reflecting this negative sentiment. In the past ten days, the NZD has continued to struggle, with the dominant narrative of a struggling economy requiring substantial monetary stimulus keeping the currency under pressure. While there have been some positive signs, such as improving consumer confidence and a narrowing trade deficit, these have been overshadowed by the broader concerns about the recession and weak domestic demand. Looking ahead to the next ten days and six weeks, the NZD is likely to remain under significant pressure. The RBNZ's monetary policy stance, economic data releases, and global risk sentiment will be crucial in determining the currency's trajectory.
Inter-markets (Previous Ten Days)
The NZX 50 index experienced volatility, influenced by domestic economic concerns and global risk sentiment. The index reached a three-week low before rebounding slightly. The yield on New Zealand's 10-year government bond is forecast to reach 4.36% by the end of the quarter.
Currency (Previous Ten Days)
The NZD remained under pressure, with the NZD/USD trading around $0.561 on Friday, January 3, heading for its fourth consecutive weekly decline. The pair dropped 0.6% during the week of December 23-27, nearing its two-year low of $0.5608 reached on December 20. The NZD/USD decreased 0.0043 or 0.76% to 0.5555 on Friday January 10 from 0.5598 in the previous trading session. The COT report as of December 10, 2024, showed a net long position in NZD futures, but this could change rapidly given the current economic climate.
Upcoming Economic Indicators (Next Ten Days)
No significant economic indicators scheduled.
Trading Thesis: The NZD remains a strong sell candidate due to the confirmed recession, the RBNZ's aggressive easing, weak domestic demand, and the uncertain global economic environment. The adage "sell into any strength" is particularly relevant for the NZD in the current climate.
Key Takeaways and Focus for the Upcoming Ten Days
As we look ahead to the next ten days, Forex traders should focus on several key themes. The divergence in central bank policies remains paramount, with the Fed's hawkish stance contrasting sharply with the easing biases of the ECB, BoC, and RBNZ. This divergence will continue to underpin the US dollar's strength, making it the most attractive currency for long positions. The Bank of Japan's potential shift towards policy normalization presents a compelling bullish case for the Japanese Yen, while the Swiss Franc's safe-haven appeal provides a degree of support despite the SNB's dovish stance.
Geopolitical uncertainties, particularly the looming inauguration of President-elect Trump and the potential for renewed trade tensions, will continue to influence market sentiment and create volatility. Traders should closely monitor any developments on this front, as they could trigger significant shifts in risk appetite.
Domestically, economic data releases from major economies will be crucial in shaping market expectations regarding future central bank actions. Traders should pay particular attention to inflation and employment figures, as these will provide insights into the health of the respective economies and the likelihood of further policy adjustments. The interplay between monetary and fiscal policy, particularly in countries like the UK and Australia, will also be a key factor to watch.
Five Key Events to Watch in the Next Ten Days:
US Inflation Data (Jan 15): The release of the US Core Inflation Rate (MoM and YoY) and Inflation Rate (MoM and YoY) for December will be pivotal in shaping market expectations regarding the Fed's future policy path. Higher-than-expected readings could reinforce the Fed's hawkish stance and further strengthen the USD, while lower-than-expected figures might provide some relief to riskier currencies.
US Retail Sales (Jan 16): The Retail Sales MoM data for December will provide insights into the strength of US consumer spending. A strong reading could further boost the USD, while a weaker-than-expected figure might raise concerns about the economic outlook.
UK GDP Data (Jan 16): The release of the UK's GDP MoM and YoY figures for November will be crucial in assessing the health of the UK economy. Positive readings could provide some temporary support to the GBP, while negative readings would likely add to the bearish sentiment.
Australian Unemployment Rate (Jan 16): The release of Australia's unemployment rate for December will be important in gauging the strength of the labor market. A higher-than-expected unemployment rate could further weaken the AUD by increasing the likelihood of an RBA rate cut, while a lower rate could provide temporary support.
BOJ Policy Meeting (Jan 23-24): Although not within the next ten days, the BOJ's upcoming policy meeting will be a significant event for the JPY. The market anticipates a potential rate hike, and any signals from the BOJ regarding the timing and magnitude of future policy adjustments will be closely scrutinized.
Sources
Bloomberg, Reuters, Trading Economics, ForexLive, Federal Reserve, ECB, BOJ, BOE, RBA, RBNZ, SNB, BOC, US Bureau of Labor Statistics, Eurostat, Statistics Canada, Australian Bureau of Statistics, Statistics New Zealand, Swiss Federal Statistical Office, Office for National Statistics, Cabinet Office Japan, Ministry of Internal Affairs and Communications, Ministry of Finance Japan, Swiss National Bank, Bank of Canada, Bank of England, European Central Bank, Reserve Bank of Australia, Reserve Bank of New Zealand.