Focus of the day:
USD: Long Live the King. Bullish.
We continue to look for USD outperformance. The upcoming FOMC meeting is unlikely to contain any major surprises, but it will be interesting to contrast the Fed’s tone with that of central banks elsewhere, which have on the whole surprised on the dovish side in 2015. In addition, the upcoming employment cost index will be closely watched for any signs of wage growth which could boost inflation in the US.
EUR: Draghi Delivers. Bearish.
Draghi delivered an asset purchases programme and gave all the details. This has caused EUR/USD to head lower and we expect this to continue as the ECB’s balance sheet is expanded towards the €3 trillion mark. In addition, should inflation not increase towards the 2% ECB targets then the ECB will continue its purchase program. CPI will be watched this week.
JPY: Still Long on the Crosses. Neutral.
While other central banks in both G10 and EM have surprised on the dovish side recently, the BoJ remained firmly on hold at its latest meeting. While the 2015 inflation forecast was revised to 1.0%, well below the central bank’s target, the 2016 forecast was actually revised upwards. This juxtaposition between easing elsewhere and a more reluctant BoJ could offer JPY support on the crosses.
CAD: BoC Surprise. Bearish.
We expect CAD could continue to weaken following the surprise BoC rate cut. We don't see the output gap closing until 2017 at the earliest, the BoC sees it still closing at the end of 2016. Indeed, the BoC does say that if oil prices stay at these levels, the output gap is set to widen further. We would not rule out further rate cuts.
AUD: Next in Line? Bearish.
The upcoming CPI print poses a risk for AUD, given lowflationary prints elsewhere and the recent slew of dovish surprises from central banks. While iron ore prices have stabilized somewhat, copper prices have weakened significantly since the start of the year, and we expect AUD could weaken as a result. While expectations of easing in China could offer AUD some support, we would sell rallies."