Global Themes

Currencies of big commodity-producing countries took a breather overnight from heavy selling pressure. Currencies such as the NOK and CAD fell to over 10-year lows after Friday’s OPEC clash triggered a slide in oil prices to six-year lows while metals such as Iron ore followed. The CRB global commodity price index yesterday hit a 2002 low with further downward pressure from a weaker Chinese economy.

The Pound will be one currency to watch now ahead of the Bank of England’s monetary policy announcement at 12:00 on Thursday. With Britain’s inflation rate currently -0.1 percent, a dovish reaction from Governor Mark Carney to the latest plunge in commodities would not bode well for Sterling. The UK currency has already lost over 4 cents in 4 days against the Euro while the GBP/USD rate is trading 0.95 percent above a 7-month low around the $1.48-1.50 price range.

The risk of the Swiss National Bank shaking currency markets with an interest rate cut or more FX intervention at 08:30 tomorrow has fallen but still cannot be ruled out. At 20:00 today New Zealand’s central bank is expected to cut interest rates.

GBP

The Bank of England’s interest rate decision tomorrow will be an even more important trading point for Sterling after oil prices tumbled to a new six year low this week, increasing the inflation challenge facing Governor Mark Carney. Worries about too low inflation and the Pound’s rise to multi-year highs against the Euro could see the BOE continue to delay raising interest rates with investors currently predicting no rate rise now until late-2016.

A more dovish BOE announcement tomorrow could leave the Pound vulnerable to a further decline against the Euro. Last week the GBP/EUR rate broke below the €1.4000 barrier and has lost some 3 percent and 4 cents since Thursday’s surprise ECB announcement on December 03. The GBP/USD rate is trading 0.95 percent above a 7-month low around the $1.48-1.50 price range. Yesterday the Pound fell after an unexpected decline in UK manufacturing data.

CHF

The risk of the Swiss National Bank shaking currency markets with an interest rate cut or more FX intervention tomorrow has fallen but still cannot be ruled out. Last week the ECB’s stimulus injection disappointed markets, and this has eased pressure on the Swiss to act with the Euro gaining sharply on December 03 and the Swiss franc weakening. However, the SNB is still under pressure to weaken the franc further against the Euro to help reverse Switzerland’s -1.4 percent inflation rate and boost exports.

Therefore a fresh move by the SNB to cut its -0.75 percent bank deposit rate or deepen its FX intervention program cannot be ruled out at 08:30 tomorrow. Last week the franc appreciated by 4 percent against the US dollar. EUR/CHF forecasts for the next 3 months range from 1.1500 to 0.9800 while GBP/CHF predictions range from 1.6416 to 1.3502. No move from the SNB on Thursday could risk a strengthening of the franc given safe haven demand due to mounting geo-political risks.

EUR

Euro Zone Q3 GDP revisions released yesterday confirmed the region grew 0.3 percent q/q which allowed the Euro to continue its recovery against the US dollar and Pound. The EUR/USD exchange rate, boosted by last week’s biggest one-day surge in six years, is attempting a break into the $1.09-1.10 price range. Despite poor German import and export numbers this morning, Euro strength is pushing the GBP/EUR towards the €1.37-1.35 price range before tomorrow’s UK interest rate decision. 

USD

The odds of a US interest rate hike next week have now increased to 80%. While the rate hike is now largely expected and mostly priced in, what’s not fully priced in is the accompanying press conference from Chair Janet Yellen, her forward guidance on 2016 and her comments about strength of the US dollar. GBP/USD forecasts for the next 3 months range by 12.7 percent, from a high of $1.5900 to lows of $1.4100.

NZD

There is a good chance that New Zealand will cut interest rates on today at 20:00 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 percent to 2.5 percent - a second cut in three months.