AUD, NZD and CAD continue to weaken amidst speculation of rate cuts by their central banks and weaker commodity prices. The rate cut speculation has been a significant source of weakness for AUD this week ahead of next week’s RBA meeting.  With the USD strengthening and prospective global commodity supply remain very strong, particularly for iron ore and oil, we expect further declines in AUD to 0.7200 and CAD to 1.3300. 

US interest rate markets consolidated yesterday, as investors took some money off the table following the huge rally Thursday.  Stock markets rebounded and the US Treasury note auctions weighed on prices.  We look to the US Q4 GDP report today, for insights into the economic strength of the US over the fourth quarter, but the positive company earnings reports (and subsequent stockmarket gains) suggest to us the US economy is doing fine; a view shared by the Fed.  We suspect the US Q4 GDP report will come in above market expectations of 3% . An upside surprise will help investors lift yields a little further to close the week (down still).  The employment cost index will also garner attention, as it is a preferred measure of wage pressure. A 0.6% (QoQ) gain will cause an acceleration in the annual rate from its current rate of 2.2% (YoY).  Both reports may support a mid-year Fed “lift off”.

EUR/USD held up relatively well in latest trade and appears to be temporarily around the 1.1200-1.1400 level. News that the preliminary estimate of German January inflation fell more than expected, lowering the annual rate to a fresh cyclical low of -1.3% failed to dampen EUR/USD.

The preliminary estimate for Eurozone CPI is due today. Expectations are for annual deflation to move from -0.2% to -0.5%. Support for EUR/USD probably came from a relief rally in Greek ten-year bond, with the yield falling for the first time in four days, to 9.87%. ECB Supervisory Board Chair Daniele Nouy, stated that Greek banks remain “pretty strong”. Developments in Greece will continue to evolve over coming quarters, generally remaining a headwind for EUR. An additional overnight interest rate cut by the central bank of Denmark to a record low of -0.50% (its third cut in the last ten days) in an attempt to weaken the kroner and support the peg to the EUR had little impact on EUR/USD.

USD/JPY lifted yesterday in line with modestly higher US Treasury yields. USD/JPY had reversed all the gains, though today after the release of Japanese December unemployment and CPI and US Q4 GDP and Q4 employment costs but USD/JPY is unlikely to break out of recent ranges for now given Japan’s improving current account surplus. The decrease in Japanese overtime hours worked is signalling the unemployment rate may start to increase while Japan’s slow recovery from recession and slump in oil prices should keep inflation easing.  We predict headline inflation of 2.2%pa and core inflation excluding tax effects of 0.6%pa.  We retain our out of consensus view that Japan will enter a mild bout of deflation by the end of 2015.  The diverging outlook between the Japanese and US economies and the FOMC and BoJ policy supports USD/JPY.

GBP/USD declined under the weight of a firmer USD, despite slightly better than expected UK partial economic data. GBP fell against EUR, but managed gains vis-à-vis AUD. Today’s UK December consumer credit figures are not likely to generate major movements for GBP or gilts. Movements in GBP/USD are likely to be driven by the US economic data due out later today.