FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that in spite of the long awaited Fed rate hike on December 16, the USD has ended the year with a whimper rather than a bang.
Key Quotes
“Although this year’s USD gains did not live up to the expectations expressed by the consensus 12 mths ago, the greenback is still the best performing G10 currency on a 12 mth view. In fact, the USD has outperformed all other G10 currencies on a 5 year view. In this period it has notched up gains of 31% vs. the JPY and 16% vs the EUR.”
“The strength of the currency has tightened monetary conditions in the US and, although the US economy is less open than most others, the USD has impacted both the external sector and the inflation backdrop. Yesterday’s release of core PCE inflation registered a stronger than expected 1.4% y/y. That said, at these levels this index is still reflecting a moderate pace of inflation. Similarly, US wage growth is still holding well below levels maintained ahead of the global financial crisis. With the USD doing a lot of the heavy lifting in terms of monetary tightening we expect that the Fed will hike no more than twice in 2016 and that this relatively gradual pace of rate hikes should help keep USD strength in check.”
“While we expect the Fed to be wary about tightening too quickly next year, we do expect that interest rate differentials will continue to drive the greenback higher. Since the carry trade is most popular when risk appetite is at heightened levels, the implication is that downside potential for EUR/USD may be better in the absence of fresh geopolitical worries or global growth concerns. Our expectation that Chinese growth concerns are set to make a re-entry into the headline in 2016 is one more reason why we remains reluctant to out a forecast for EUR/USD1.00 onto our forecast table.”
“Risk that the PBoC may allow the CNY to weaken in 2016, could imply an extension of the easing cycle of China’s main trading partner in retaliation. This should support the USD vs. currencies vs. the JPY, AUD and the EUR. We expect GBP/USD to be on the back foot in the first part of the year as the BoE exhibit little rush to hike rates. However, a better tone for sterling is likely to re-emerge towards the latter part of the New Year.”
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