All eyes on the FOMC next week

Weekly FX Wrap: All eyes on the FOMC next week; rate hike priced in but what about 2017? USD/JPY through 115.00 already, but sub 1.0500 EUR/USD not so straightforward.  

Since the US election win for Donald Trump, it has been one way traffic for US equities and the USD, and this was continued through the week as record highs were attained in the S&P 500 and the Dow.  For the key USD rates, we have seen a 14 JPY move in USD/JPY, piercing 115.00 earlier today and pressing higher despite overbought levels.    

It has been a double whammy for EUR/USD having touched on 1.1300 last month but since dropping to 1.0500 (in the wake of the No vote in the Italian referendum) before the larger buy orders came in.  A modest recovery to 1.0800 initially and 1.0850-70 since was aided by the ECB meeting yesterday where the governing council effectively eased raised yet still raised the spectre of ‘tapering’ as the monthly purchases were reduced by Eur20bln, albeit for a longer period. We have since returned to the downside, but progress to the early week lows are proving a little more staggered this time around.   

From here, it is all eyes on the FOMC next week, and while a 25bp hike is fully priced in, rhetoric on the rate path beyond 2016 will be in focus, with such hawkish expectations lifting 5yr UST yields to near 2.00% and 10yr 2.50%.  There is no disputing the US economy is performing well at present, but aggressive USD strengthening may also be brought into question, as the potential impact on inflation will not go unnoticed.  

Going against the USD tide have been the traditional risk related currencies, with AUD/USD eyeing .7500+ again and NZD looking to reclaim .7200. In Australia this week, we saw both Q3 growth contracting and the trade deficit widening, but as base metals remained buoyed on the promise of wide-scale infrastructure spending, traders have been looking past the near term negatives and focusing on the global growth prospects reflected in the stock markets.  This may or may not be confirmed in the NAB business confidence survey for Nov on Monday, but Australian jobs on Thursday will be the key release here.  NZ Q3 GDP is due out on Wednesday, and test the resilience of the NZD if it mirrors that of Australia.  

For the CAD, the OPEC deal has certainly come as welcome support, having staved off a charge on 1.3600.  We have since gone on to test the mid 1.3100’s, but is starting to look overstretched as Oil price gains have also slowed. Domestic data thin on the ground next week.  

In the UK, central bank risk limited this time around, though the latest inflation readings will prove interesting given the heavy GBP devaluation.  This was addressed to a degree this week, though Cable came up against a wall of offers ahead of the previous post Brexit lows just under 1.2800.  EUR/GBP looks to be the easier way to express further GBP recovery, with greater parliamentary involvement in leaving the EU and the subsequent negotiations.