What is interesting at the start of the new year is the persistent divergence between the number of expected Fed rate hikes by the market and the glide path for the Fed fund rates implied by the December dot-plot.
This divergence could suggest that the Fed may tolerate lower US inflation and growth before changing its policy outlook. In turn, unless the US inflation or growth surprise significantly on the downside in coming quarters, this could pave the way for some hawkish surprises from the Fed.
This could further highlight the positive outlook for USD against the rest of G10. We remain particularly bearish on the antipodean currencies where we expect the combination of weak commodity prices and continuing Chinese slowdown to undermine the appeal of both AUD and NZD.
We also think that both USD/CHF and USD/JPY could head higher from here because we expect that the persistent portfolio outflows from Japan and Switzerland and into the US to become increasingly unhedged and thus have greater impact on FX spot.
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