Policymakers will continue to dominate the foreign exchange markets in a busy H1
2015. Monetary policy divergence trades remain our favoured strategies and the
rhetoric has reinforced this as 2014 draws to a close. We expect downside in
EURUSD and EURGBP, while USDJPY should rise, and we think the best
performing trades will position for this. Geopolitical risk and positioning will mean
timing is crucial in entering into, or adding to, USDJPY long positions in particular.
After its surprise rate cut this week, the SNB has reinforced its commitment to its
EURCHF floor and boosted the CHF as a funding currency. In 2015 we will also
see the start of quantitative easing by the European Central Bank (ECB) which will
start to close the balance sheet gap with the Federal Reserve (see chart). Given
this, we think the EURUSD will begin its descent to 1.15. Preliminary CPI readings
for December will be released on 7 January.
The USD will lead the G10 FX Pack. Much like the eurozone, inflation remains key
and the FOMC has stated it is watching developments closely. How can the FOMC
be more hawkish if inflation is still low? Our economists highlight that US economic
slack is narrowing, and that the FOMC has upgraded its labour market projections.
Key upcoming reports include the core PCE deflator (23 December), FOMC
minutes (7 January) and the non-farm payroll employment report (9 January).
There is clear consensus for USDJPY to trade higher in 2015. Positioning
squeezes coinciding with risk events will offer buying opportunities. Geopolitical
risk will continue to loom. Equities and the oil price will be key ‘transmission
mechanisms’ for currencies and for USDJPY. There is also some idiosyncratic risk:
Greece’s election risk, though contained, should be watched. Failed (second and
third-round) parliamentary votes for a new president would bring a general election
– a potentially unsettling one for the EUR amid thin holiday liquidity.