Currencies Outlook: Disappointed with EUR, optimistic about USD, cautious about Asia

Last week, the EUR appreciated 3% on disappointment over the European Central Bank's (ECB) fresh stimulus measures on 3 Dec. Naturally, there is concern that the Fed's rate lift-off next week (16 Dec) may turn out to be another "buy the rumor, sell the fact" outcome for the US dollar. Then again, the two events are different. On the EUR, European stocks were disappointed that the ECB's actions did not match its dovish tone. 

Last Friday, US stocks rose when the upside surprise in US nonfarm payrolls matched Fed Chair Janet Yellen's optimistic economic outlook. Hence, it is only reasonable to stay disappointed with the EUR and to view the DXY (USD) index more favorably. The ECB's policy objective is to weaken monetary conditions by pushing the real exchange rate lower. 

Asian currencies, meanwhile, have been fairly stable ahead of the expected US rate hike next week. Yet, it may be premature to assume that the worst is over for Asian currencies. Although USD/SGD fell below 1.40 for the first time since 3 Nov, the trendline support around 1.39 held. As for indebted currencies sensitive to higher US borrowing costs, USD/IDR climbed steadily to 13830 from its recent low of 13200 on 15 Oct. USD/INR hit 67 last week, a level not seen since the emerging market volatility in Sep 2013. 

There is a difference between the Fed taper and the Fed lift-off. US short-term rates eased ahead and after the first Fed taper. After quantitative easing ended in the US in Oct 2013, short-term rates have been rising ahead of next week's lift-off. With the Fed seeking a gradual rate hike cycle, they are likely to keep rising into the next hike in 1Q16.