G10 FX: Monetary policy to remain a key driver - Nomura

Analysts at Nomura find that in 2017, rates differentials have continued to play a crucial role in explaining relative G10 FX performance.

Key Quotes

 “We have seen a large divergence emerging between EUR/USD and the rates differential recently, but we view this is likely explained by temporary factors. Thus, we expect monetary policy expectations to remain a key driver of G10 FX in 2018, with volatility likely to remain subdued and more central banks moving towards normalisation in 2018. Thus, gauging which economies will see the largest inflationary impacts can be important in determining policy direction in 2018.”

“We continue to expect a hawkish shift from the ECB, which could see the EUR upside trend continue in 2018. We expect the Scandies to outperform the EUR – particularly NOK – and GBP to remain supported by the BoE hiking twice in 2018. Meanwhile, Fed hikes at this mature stage in the policy cycle are unlikely to provide the USD with much respite as the rest of the world leaves the lower bound. AUD, NZD and CHF are likely to underperform with their central banks’ dovish stances remaining intact through 2018.”