FX daily: Markets start to price some hikes

Moving towards year-end, we're starting to see FX markets looking ahead into 2026 and pricing the first rate hikes amongst a broader range of countries. Beyond Japan, the market now prices hikes in Australia and Canada, and could perhaps even start to do so for the eurozone after today's comments from the ECB's Isabel Schnabel. This could weigh on the dollar.

USD: Looking at the broader rate story

As we move into year-end, one notable theme is a market pricing the lows in interest rate cycles in a broadening number of G10 countries. Aside from the independently hawkish Bank of Japan story, the market is now pricing a first full 25bp hike next year in the likes of Australia, New Zealand and Canada. And the European Central Bank's Isabel Schnabel (see below) says she doesn't mind that pricing emerging for the eurozone, either.

Assuming that the Federal Reserve stays in dovish mode – we'll find out more about that on Wednesday – a turn in the policy rate cycles overseas should be another factor contributing to a mildly weaker dollar in 2026. On this subject, we'll also get to hear from central bankers in Australia and Canada at their policy rate meetings on Tuesday and Wednesday this week.

In other news today, China has delivered another upside surprise in its export performance, with perhaps two takeaways. The first is that global demand is holding up quite well despite this year's tariff volatility. The second is that China's domestic demand remains subdued, and if it isn't careful, trading blocs like the eurozone will raise protective trade barriers if there is not enough reciprocal demand from the Chinese side.

In terms of the US data calendar this week, we've got US JOLTS job opening data tomorrow and the FOMC meeting on Wednesday evening. The Fed could be a positive event risk for the dollar in that it seems hard for the Fed to validate the 90bp of easing priced into Fed Funds futures by early 2027. However, the potential formal nomination of Kevin Hassett as Fed Chair over the coming months and the seasonal factors keeping the dollar weak into year-end should limit the dollar's upside.

For today, DXY could continue to trade in a tight 98.80-99.20 range.

EUR: Schnabel sounds upbeat

Whisper it, but we have a key ECB official suggesting that eurozone growth risks could be to the upside. The ECB's Isabel Schnabel made these remarks in an interview released this morning, citing that upside surprises could come from three directions: household consumption, private sector investment and government outlays on infrastructure and defence. These remarks probably need to be seen in the context of her hawkish background and perhaps as a foil to those at the ECB still favouring one last rate cut. But Schnabel has suggested the ECB could revise up its growth forecasts in its next forecast round on 18 December and has said she's comfortable with markets pricing the next ECB move as a rate hike.

These comments have helped the euro this morning and stand to narrow US hedging costs for eurozone investors further still.

1.1630-1.1680 is the short-term range, with an outside risk of a push to the 1.1700/1730 before Wednesday's Fed event risk.

CEE: Another test of the forint's resilience

This week will bring more inflation numbers in the region and decisions from central banks. Today, industrial production data will be published in the Czech Republic, which should show continued stagnation in production. More interesting will be November inflation in Hungary, which we expect to have fallen from 4.3% to 3.7% year-on-year and core inflation from 4.2% to 3.9%.

On Wednesday, we will see industrial data in Turkey and final inflation figures in the Czech Republic. On Thursday, the Central Bank of Turkey will decide on rates for the last time this year. While the November inflation figures support further rate cuts, the GDP data shows a slower disinflation process. Overall, we expect the central bank to remain cautious and cut rates by 100bp, but the risk is a larger step.

On Friday, November inflation in Romania is likely to show a 9.7% YoY reading, with no major changes from the previous month.

CEE currencies continue to follow the negotiations on a peace agreement between Ukraine and Russia. However, the positive momentum has again run out a bit. We still believe that some tangible progress would be a positive boost for CEE currencies, given the sceptical market approach. EUR/USD’s move up last week adds to the bullish case for the region.

Still, the rates market is switching to dovish mode after another National Bank of Poland rate cut and surprisingly low inflation in the Czech Republic last week. This week, Hungarian inflation should confirm this trend, which will push the market towards more rate cut pricing, undermining FX strength. Overall, we are neutral for this week, depending on the details of geopolitical and Fed guidance.

EUR/HUF may see some upward pressure after Fitch downgraded the rating outlook to negative, and our expected lower inflation this week. In the absence of progress in the Ukrainian story, we could test the 383 level again in the coming days.

BRL: Political volatility

Brazilian assets were hit on Friday when former Brazilian president Jair Bolsonaro endorsed his son, Flavio, as a candidate for the right-wing in next year's presidential election. The move upends what was the emerging consensus that the more moderate São Paulo Governor, Tarcisio de Freitas, would be the unopposed right-wing candidate to challenge the incumbent President Luiz Inácio Lula da Silva.

There's a long way to go until next October's presidential election, and sitting short the real, with a 13% per annum cost of carry, is an expensive proposition. But the news serves as a reminder that local politics can always upend what is otherwise a very attractive carry trade play. We have a 5.50 forecast for USD/BRL next year to account for this political uncertainty.

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