Weekly Outlook: 2015, December 13 - 20

Liftoff A Dec 2015 Sputter, 2016 USD Plus - Citi

In its weekly note to clients, CitiFX draws a strong distinction between the immediate USD impact of the Fed's likely liftoff next week and how it will play out in 2016.

"We think the Fed has no incentive to sound hawkish next week and its priority will be to establish that the US economy is robust enough to deal with the beginning of normalization.

We doubt that they want a strong USD to follow immediately on liftoff as it would probably be associated with weaker equities and pressure on asset market during a period of low liquidity.

Once the principle normalization has been established, we think the Fed can revert to a data dependent hiking path which may imply a faster pace of hiking subsequently.

This may not come through immediately in 2016 strengthen as the rate path firms. but as H1 progresses we expect to see the USD strengthen as the rate path firms," Citi argues.

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The US dollar was pressured against most currencies in a week that saw very unsettled stock and commodity markets. On the agenda we have German Economic Sentiment, UK employment data, US housing and inflation data, and the highly important FOMC decision which is dubbed as historic. These are the market movers for this week.

US Consumer confidence rebounded, rising to 91.8 in December, the highest level in four months amid positive views on household finances and consumer spending. Buying conditions for household purchases were rated positively by 81% of all consumers. This helped the greenback recover in a week that saw it losing ground. The euro still enjoyed the Draghi disappointment, the Aussie enjoyed good employment data, the NZD a “hawkish cut” and the yen was powered by safe haven flows. The severe sell-off of oil resulted in a crash of oil prices alongside CAD. The bottom of the barrel is still elusive.

1. UK inflation data: Tuesday, 9:30. UK inflation was negative for a second consecutive month in October, reaching -0.1%. Clothing prices were the biggest contributors to inflation, but declining food prices offset this price rise. The subdued inflation suggests the Bank of England’s monetary policy committee will be in no hurry to push up interest rates in the coming months. A rise of 0.1% is expected this time.
2. German ZEW Economic Sentiment: Tuesday, 10:00. German economic sentiment edged up in November following a seven-month decline, suggesting renewed momentum. The index rose to 10.4 from 1.9 in October, but remained below its average of 24.8. Economists expected the index to rise to 6.7. The outlook section has improved and the rising domestic consumption together with the ongoing improvement in the US economy is expected to increase growth in the coming months. German economic sentiment is expected to reach15.2 in December.
3. US inflation data: Tuesday, 13:30. U.S. consumer prices increased 0.2% in October after two straight months of declines. Rising prices of gasoline and a range of other goods caused this modest increase in CPI. The reading was in line with market forecast. Meanwhile, core CPI excluding food and energy costs, closely monitored by the Fed, also gained 0.2% after a similar rise in the previous month. This is a positive sign for the coming months. CPI is expected to remain flat while core CPI is expected to climb 0.2%.
4. UK employment data: Wednesday, 9:30. UK Claimant Count Change increased from 0.5K to 3.3K in October, beating forecasts of a 1.6K rise. The Average Earnings Index remained unchanged at 3.0%, a bit lower than the 3.2% rise estimated. The U.K. Unemployment Rate decreased unexpectedly from 5.4% to 5.3% in September, while analysts estimated no change. Claimant Count Change is expected to rise 0.9K this time.
5. US Building Permits: Wednesday, 13:30 New applications for building permits gained 4.1% to a seasonally adjusted annual rate of 1.15 million. Single-family permits increased to their highest level since December 2007. Economists expected the same reading. The overall housing data suggests the market has been improving this year but still below its prerecession levels. The number of building permits is predicted to rise to 1.16 million in November.
6. US FOMC rate decision: Wednesday, 19:00 with a press conference at 19:30. Federal Reserve Chair Janet Yellen said she was “looking forward” to a U.S. interest rate, noting this rise will prove that the economy has recovered from recession. The majority of policymakers believe the first rate hike in almost a decade will be announced at their next meeting on Dec. 15-16. U.S. consumer spending is solid and inflation outlook is expected to rebound next year after pressures related to the strong dollar and low energy prices will fade. The recent positive NFP seemed to have cemented the hike. The Fed is expected to raise interest rate from 0.25% to 0.50%. If the Fed follows through, it will be the first hike since 2006. See all the updates for this historic decision.
7. NZ GDP: Wednesday, 21:45. New Zealand economic growth expanded less expected in the second quarter, rising 0.4% amid a decline in manufacturing and residential construction, offsetting a recovery in farm output. Economists expected a stronger growth of 0.5%. Annual growth slowed from a revised 2.7% in the first quarter. Falling export prices, fewer investments and weak demand, stall growth.
8. Eurozone German Ifo Business Climate: Thursday, 9:00. Germany’s business sentiment edged up to 109.0 in November, following 108.2 in the prior month. Economists expected a reading of 108.3. The outlook index increased to 104.7 compared to 103.9 in October and the current assessment index increased to 113.4 from the upwardly revised 112.7 in October. German business climate is expected to rise further to 109.2 in December.
9. US Philly Fed Manufacturing Index: Thursday, 13:30. The Philadelphia area manufacturing index rose from -4.5 in October to 1.9 in November, returning into positive territory for the first time in two months. The reading was higher than the -0.8 reading forecasted. However, new orders and shipments remained negative while the number of employees rose to 2.6 after a print of -1.7 in the month before. The Philly index is expected to reach 2.1 this time.
10. US Unemployment Claims: Thursday, 13:30. The number of Americans filing initial claims for unemployment benefits edged up to a five-month high of 282,000. However, the underlying trend remained positive. The reports did not change views the Federal Reserve will raise interest rates in December since jobless claims tend to be volatile. The four-week moving average of claims rose 1,500 to 270,750 last week. Claims have remained below the 300,000 threshold for 40 straight weeks. This is the longest stretch since the early 1970s. The number of jobless claims is estimated to reach 271,000.
11. Japan rate decision: Friday. The Bank of Japan kept monetary policy unchanged despite a worsening in economic conditions. However, policy makers continued to argue the recovery is on track. The BOJ signaled it will keep policy until inflation is back on track. The central bank’s decision came after Japan recorded an unexpected Y111bn trade surplus for October showing the economy’s gain from falling oil prices. However, exports declined 2.1% due to the slowdown in China.

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Euro Forecast – Europe: There is Nothing Civil about Civil War, in Politics or Economics
So how about that Euro, huh? After last week’s four-handle burst on the back of the ECB disappointment, many traders looked at this as a gift from markets: The potential to short the currency of an economy that’s facing significant headwinds without the ability to form a strong enough coalition to actually try to counter this weakness.

British Pound Forecast – British Pound Looks Like a Buy, but Watch Huge Event Risk on Fed Decision
Another big week for the British Pound left the GBP/USD exchange rate at fresh monthly highs, but an even-bigger week ahead warns of major volatility for all US Dollar FX counterparts.

Japanese Yen Forecast – JPY Sees Biggest Weekly Gain in 3 Months on Risk Rout
When the Japanese Yen is best performer against the US Dollar over a week and is higher against 31 of its peers over a sixth month span, global markets are typically not ‘Bullish’.

Australian Dollar Forecast – Australian Dollar May Drop as Fed Rate Hike Sinks Risk Appetite
The Australian Dollar may decline if risk aversion breaks out after the Federal Reserve finally delivers its first post-QE interest rate hike at next week’s policy meeting.

Chinese Yuan (CNH) Forecast – Will the Chinese Yuan Stop Falling in the Week Ahead?
In the past week, the Chinese yuan offshore exchange rate against the US Dollar has had little upside action, despite the US Dollar seeing higher volatility while breaking major technical support levels against other currencies.

Gold Forecast – Gold Primed for a push Higher- Sell the Fed Rip
Gold prices are softer this week with the precious metal down nearly 1% to trade at 1075 ahead of the New York close on Friday.

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