Greenback in demand in a relatively quiet week – Nomura

Research Team at Nomura, notes that it was a relatively quiet week in terms of events; however, the dollar continued to strengthen, remaining supported by US yields moving higher.

Key Quotes

“OPEC headlines continued to move the oil market as the 30 November meeting approaches. Our China oil and gas team believe there is a 70% chance of OPEC announcing cuts at the meeting next week. It believes Iran is likely to cooperate with Saudi Arabia, as it needs higher oil prices to attract investment to lift long-term production.” 

“The FOMC minutes for the December meeting suggested a rate hike in December is likely in our economists’ view. Our economists published an update of the “Trump effect” on the US economy. The main changes to the forecasts are the GDP growth forecast for 2017, which is now 2.0% (from 1.9%), and for 2018, which is now 1.8% (from 1.6%). PCE growth was also upwardly revised in 2018 to 1.9% (from 1.6%). It expects a slightly more aggressive Fed (with two hikes in 2017 and three in 2018).”

“European politics remain the market’s focus with the event risks over the next 12 months. The impact of risk sentiment on EUR has been changing. In 2010-11, EUR tended to weaken in a risk-off environment. The relationship has changed under the ECB’s QE, and until recently EUR tended to appreciate amid risk-off. The relationship keeps changing, and currently EUR is reacting more neutrally to risk sentiment. The direction of the correlation will be important for how EUR/USD trades into 2017, and will be linked to ECB policy.”

“Japanese major lifers raised their FX hedge ratio during H1 FY2016 amid increased uncertainty on the political outlook. The hedge ratio is estimated to be 63.1% as of end September, rising from 56.2% as of end-March. Political uncertainty in the US and Europe remains high, but widening yield spreads are increasing the attractiveness of foreign bond investment for lifers. As the pace of Fed rate hikes could accelerate under the Trump administration, currency hedge costs are likely to keep rising for Japanese investors. As their FX risk-taking activities were already cautious, a gradual decline in the FX hedge ratio is likely. A 5% reduction in their FX hedge ratio could generate JPY3.8trn ($34bn) of JPY selling. Lifers’ JPY selling will support a rise in USD/JPY into 2017.”