Currency Market Analysis

Dec 08, 2015 | Currency Market Analysis

Global Themes

New Zealand’s central bank is expected to slash interest rates tonight for a second time in three months to halt the kiwi dollar’s appreciation in Q4. The Bank of England may also remain active in trying to dampen the Pound’s appreciation against the Euro in Thursday policy announcement, as currency strength and falling commodity prices threaten Governor Mark Carney’s inflation goals.
Oil prices have sunk yet again, down by more than 8% since OPEC clashed in Friday’s meeting to discuss pricing. OPEC effectively abandoned an agreement of slowing output to control prices in reaction to competition from Russia and North America. Currencies linked to Oil such as the Ruble have plunged with the Canadian dollar hitting its worst levels since 2004.
Last week’s unexpected ECB policy announcement triggered the Euro’s biggest one-day rise since March 2009 and third biggest on record as central bank announcements continue to cause aggressive currency moves. This does not bode well for businesses trying to gauge how the December 16th US interest rate decision will impact exchange rates. GBP/USD forecasts for the next 3 months range by 12.7%, from a high of $1.5900 to lows of $1.4100.


There is a good chance that New Zealand will cut interest rates on Wednesday morning to halt the Kiwi dollar’s appreciation. In October the RBNZ warned that if the currency remained too high it may slash rates in response. The kiwi’s rally in Q4 has taken it to its strongest levels since June against Sterling. Consensus expectations are for the RBNZ to lower rates from 2.75% to 2.5% - a second cut in three months.


The Renminbi is facing its third straight day of losses against the USD and is moving towards its weakest levels in four months as markets predict more stimulus action from China’s central bank. Overnight data covering China’s international trade activity in November was poor again, with exports falling by a more-than-expected 6.8% y/y - a fifth straight month of contraction. Imports fell 12.6% for the 13th monthly decline in a row. The People’s Bank of China has cut interest rates six time since November 2014.


Markets will watch for today’s UK manufacturing report at 09:30 although the Bank of England’s interest rate decision this Thursday still remains the key trading point for Sterling. Given worries about too low inflation and the Pound’s rise to multi-year highs against the Euro, the BOE could continue to sound dovish on interest rates. The GBP/USD rate is trading 1.5% above a 7-month low around the $1.48-1.50 price range while the GBP/EUR rate fell by 3% last week.


Euro Zone Q3 GDP revisions will be released this morning at 10:00 with expectations of no change unlikely to have any material impact on the Euro. The revisions are expected to re-confirm economic growth of 0.3% between July and September. Traders continue to reflect on last week’s unexpected ECB policy announcement which caused the Euro’s biggest one-day rise since March 2009 and third biggest on record.


Investors remain extremely divided on how a US interest rate hike on December 16 will impact currency markets. While a US rate hike is now largely expected and mostly priced in, what’s not priced in is the accompanying press conference from Chair Janet Yellen and her forward guidance on 2016. GBP/USD forecasts for the next 3 months range by 12.7%, from a high of $1.5900 to lows of $1.4100. EUR/USD forecasts between now and February next year range from highs of $1.1300 to lows of $0.9900.

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