USD: The greenback remains the strongest currency fundamentally given the Fed raised rates in December and intend to raise several more times during 2016. Inflation however remains a point of concern and will be the most likely factor to slow the tightening of policy. Employment for December was again stellar at nearly 300k jobs gained, however the increasingly more important Average Hourly Earnings was flat, which dampened bullishness in the buck.
EUR: The euro continues to be one of the weaker major currencies fundamentally due to the active easing cycle by the ECB. CPI for December missed expectations with the core at 0.9% y/y and headline at 0.2% y/y. Failure to see a move higher in EZ inflation will keep pressure on euro. The euro currently holds a strong correlation with risk-off sentiment, causing it to appreciate on safe-haven flows.
GBP: Sterling remains a relatively strong currency in the longer term, due to the BOE’s intention to raise interest rates in late 2016 or early 2017. However the currency has seen weakness in recent weeks as the exchange rate is repriced for a later liftoff date due to subdued inflation. The referendum regarding Britain’s exit from the EU also contributes to bearish sentiment on the currency due to political uncertainty.
AUD: The Australian dollar is a neutral currency while the RBA remain on hold. The central bank is unlikely to cut interest rates until they see Q4 inflation data, which is not released until January 27. The RBA will remain on hold in February if inflation is not of concern. The employment situation in Australia has been excellent in the latter half of 2015, despite a slowdown in the mining sector. The most recent jobs release for December showed -1,000 jobs lost which is the largest decline in 8 months.
NZD: The RBNZ cut rates for the fourth time in 2015 at the December 10 meeting but moved to a more neutral stance in their statement which supported Kiwi. Dairy prices will be an important factor for the Kiwi going forward.
CAD: The Canadian dollar is weak bearish currency due to the fall in the price of oil. There remains a possibility that the BOC will cut rates on January 20.
JPY: The Japanese economy has failed to show any meaningful signs on recovery since the massive QQE program was implemented. The BOJ are watching CPI excluding food & energy to gauge underlying inflation trend. If underlying inflation does not pick up then the BOJ may have to increase the size of its QQE program yet again. The BOJ’s own measure of underlying inflation is at 1.2%, with a target of 2%.
CHF: The franc is fundamentally a weak currency given the SNB’s negative interest rates, however it can suddenly rally on safe-haven flows. The SNB regularly recite that the franc is overvalued and they are prepared to intervene to weaken the currency. The franc’s direction is difficult to predict due to regular intervention by the SNB.
This article originally appeared at Jarratt Davis.