Market : EUR/USD likely to trade side-ways into year-end (Dec 2015 No2)
- Euro Area inflation expectations in the long term declined once again after the disappointing ECB meeting and muted inflationary pressure is likely in the time horizon.
- "We expect EUR/USD to trade side-ways into year-end as the data calendar is light and event risks (eg, Fed, ECB) are behind us. Yet, we think 2016 will bring about another year of significant EUR depreciation with the Fed/ECB policy divergence taking centre stage", says Barclays in a research note.
- EUR real effective exchange rate is near its January levels, after ECB announced its QE first. This is likely to imply longer policy accomodation which could send EUR to a lower level than previously expected.
Currently EUR/USD is trading at 1.0865.
Forming a government will not be easy in Spain
- With over 99% of the vote counted, the results of the general election delivered neither an absolute majority for a single party (as was widely expected) nor any clear government coalition. Therefore, a minority government would seem the most likely outcome, even if it likely will take several weeks of discussions before a government gets the necessary parliamentary approval. Although it is not our base case, we cannot rule out new elections early next year if no party obtains a simple majority in parliament.
- PP won the elections and obtained 123 MPs. PSOE was second with 90 MPs. The two new parties, Podemos and Ciudadanos, entered the parliament in third and fourth place, respectively; however, Podemos did better, winning 69 MPs, and Ciudadanos fared worse, garnering 40 MPs, than had been signaled by polls.
- The bottom line is that there is no obvious alliance that would add up to the 176 seats needed for an absolute majority in the 350-seat Parliament.
- A PP-PSOE alliance is highly unlikely based on the statements by the leaders of the two largest parties.
- PP and Ciudadanos would get 163 seats, and PSOE and Ciudadanos would get 130.
- PSOE and Podemos would get 159 seats.
- Ciudadanos has ruled out joining Podemos in any multi-party alliance.
- As for the rest of the parties, practically all are nationalist parties from either Catalonia or the Basque Country, which makes them unlikely coalition partners for either PP or PSOE
- On the economic side, we have seen no sign of a slowdown in economic activity in Q4 15. Therefore, another strong growth print is expected in Q4 of c. 0.8% q/q. For 2016, as the ECB will continue to be supportive, oil is expected to remain cheap and the euro relatively weak, the Spanish economy is expected to expand 2.8%. It is believed that the policies of the next government could determine whether Spain's growth prospects move closer to Ireland's or stay closer to those of its southern European neighbours.
- While progress has been made since 2012, some shortcomings create uncertainty about Spain's medium-term growth prospects and the sustainability of public and foreign debt. It is believed that a dual labour market, low productivity and one of the highest long-term unemployment rates among euro area countries require policy action. It is also believed that further productivity and growth gains are critical for fiscal and external solvency (for a detailed economic and political analysis)
Regional divergence intact for 2016
- Both the Riksbank and Norges Bank left policy unchanged last week. In the near term, EURNOK is expected to trade hand-in-hand with oil prices but think a correction lower is more likely than a break higher into year-end as the FFV model points towards EURNOK overvaluation.
- "We would be looking for a meaningful move lower to engage in long positions ahead of weak Q1 data and an eventual Norges Bank cut in Q1 2016, which we currently envision", says Barclays.
- On the contrary, relative SEK outperformance is expected among the European currency complex on solid economic fundamentals. The recent wave of migrant influx into Sweden is expected to support growth and inflation, according to the Riksbank's recent projections, and although the Bank is expected to retain a "wait-and-see" stance in the coming months, it is hard for the Bank to justify much looser monetary policy.
- The data calendar in the next fortnight is unsurprisingly quiet. Market attention will likely centre around the December Swedish ETS report (Monday 21), expected to re-affirm the solid growth outlook. Upticks are expected in manufacturing and consumer confidence following recent months of somewhat weaker prints for the latter. The market expects the headline index to increase to 106.9 from 106.5 in November. The NIER Swedish Economic forecasts (Monday) is expected to present a bullish outlook heading into 2016.
EUR/USD bearish, watch 1.0790
- The week ahead will likely be a quiet one, albeit still with some key US data components to go while desks will be light. However, that is not to say there can be no action as often in illiquid markets swings can be wild.
- However, the stage is set for 2016 with the Fed having made lift-off and the guessing games around other Central Banks is a little less open with recent meetings offering a little more clarity from the likes of the RBA (neutral/dovish), RBNZ (dovish) , ECB (dovish), BoE (neutral/hawkish) and BOJ (neutral/dovish).
- The divergence between them and the Fed remains the key driver and data will of course be key as we kick of the New Year. The biggest concerns will stay with EM's, commodity markets and China as driving forces and the biggest question will be how the Fed will be reacting, or how pro-active they will be in respect of events in Global markets and domestically and whether they can continue to increase their interest rates or be required to take a more dovish stance in disinflationary headwinds from overseas.
- What will 2016 bring to the Forex traders?
- In respect of 2016's outlook, last Friday, Mr Tri Utomo AS wrapped up the year with an expert panel covering many of the questions on our minds and forecasting and debating the key possibilities and risks in the FX space in "What will 2016 bring to the Forex traders?" live session that anyone serious about trading FX might enjoy to watch here. Topics discussed were from the Yuan and China in the theme of the currency wars, oil prices and commodities, EM's and Central Banks to currency forecasts in particular.
- For this week, keep an eye out for dollar repatriation, if there is anything less to do outside of option expiry, US GDP Q3, NZ trade balance and US durable goods, oh...and Santa Claus.
- EUR/USD technically
- Valeria Bednarik, Mr Tri Utomo AS explained that EUR/USD technically speaking, has lost the bullish potential triggered by the ECB earlier this month, as it broke below 1.0880, right after FED's announcement, and held below it for the second half of the week. "The level represents the 38.2% retracement of the October/December decline, and as long as below it, gains should remain limited.
- The 4 hours chart shows that the 20 SMA heads lower and converges with the mentioned Fibonacci resistance, while the technical indicators are turning south below their mid-lines, following a corrective movement from oversold readings, supporting further declines. Nevertheless, it would take a break through 1.0790 to confirm some steadier downward momentum during the upcoming days."
UK growth likely to fall further to 1.9% y/y in 2016
- There is final read of UK Q3 GDP this week, which is important for GBP and is expected to be dropped modestly from the previous reading of 2.4% yoy in Q2 and 2.7% in Q1, widely by consensus.
- Despite this week's November retail sales upward surprise, further drops in UK growth momentum is expected at a pace of 2.0% in fourth quarter of this year.
"Next year we forecast UK growth to fall further to 1.9% y/y as tight fiscal policy and EU referendum risk bite", says Barclays in a research note.
CBT likely to raise repo rate to 9.5pct by Q1 16
- The central bank of Turkey is likely to hike its bank rate in order to balance the interest rate differential caused by recent rate hike by the U.S. Fed. The CBT increased remuneration on FX required reserves by 25bp last week.
- The Bank is expected to hike its one-week repo rate 50bp in the December MPC meeting to be held tomorrow, and thereby raising it to 9.5% by the end of Q1 16, foresees Barclays.
- The central bank is unlikely to change in the O/N lending rate in the imminent future, but it may start cutting in Q2, 2016.
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