A Fresh Start

The start of a new year is always accompanied by a sense of optimism and renewed hope in what fate and our own hard efforts will bring our way.

John J. Hardy - Head of FX Strategy

Foreign Exchange

More than ever, now that the Fed is actively adjusting interest-rate policy again, the outlook for global markets and all currencies, major and minor, hinges on the Fed hikes to come and adjustments in the market’s anticipation of the pace of those hikes.

EUR – We don’t expect the euro to be strong in Q1, and it could fall towards the lows and somewhat beyond against the USD. But the Eurozone economy could continue to improve in Q1 after reasonably solid improvements in Q4. The credit angle suggests few reasons for concern, though eventually the Eurozone will suffer a fresh round of existential risks with the next recession – and possibly before – as periphery problems in the likes of Greece and Portugal keep simmering.

GBP – Sterling is at the crossroads of our themes and is a difficult call for 2016. The market has treated the currency as a “USD lite” over the last 18 months on anticipation that the Bank of England would move more or less in line with the Fed, if with a bit of a delay. That theme could provide marginal support for sterling in early 2016, but there are offsetting negative factors. These include fiscal headwinds from the UK government leaning against growth prospects, simmering Brexit fears, and the fact that the BoE has at least one eye on the ECB’s QE in sending out somewhat dovish signals in late 2015. Finally, the UK has an enormous current account deficit that could be a drag on the currency in a higher-volatility environment.

RMB – It is clear that China would like a broadly weaker renminbi in 2016 and after having followed the USD stronger over the last couple of years. In 2015, China finally tore its exchange rate regime off the USD semi-peg and it could float more freely in 2016. The policy divergence focus, with the US Fed tightening policy while China continues to ease, could see a revaluation of the renminbi and fall of well over 10% versus the USD as China tries to export some of its deflationary pain from over-capacity.

by John J. Hardy - Head of FX Strategy

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