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2017 has been the year in which more central banks broke ranks. We expect this to continue in 2018. The Fed will hike four times and the BoC two, which supports long positions in USD and CAD.
Risk-reward-considerations: In view of the globally rather synchronized economic recovery, market participants are looking for attractive risk-reward-opportunities that the USD does not have to offer. Yes, of course, the US economy is doing well, but the Fed is already tightening its monetary policy.
Investors see little chance that the economy will pick up further from current levels or that inflation will suddenly be at risk of overshooting, both factors that would justify a notably faster rate hike speed and thus a stronger USD. Things are looking differently in the eurozone. Here too the economy is doing well, but the ECB is still pursuing an accommodating monetary policy, as it is still injecting liquidity into the market every month via its asset purchasing programme.
While EUR should benefit from the prospect of the ECB completing QE just as it rallied on the expectation of tapering this year. The Fed was first out of the blocks with a strong policy response to the global financial crisis, as the ECB edges towards normalization, an undervalued euro has room to rise further.
On the flip side, the Kiwi is expected to lose its pole position in terms of offering the highest central bank policy rate in G10 next year, and this should keep the currency a laggard. Moribund milk powder prices should also continue to drag on the currency
Hence, we pair EUR against NZD to neutralize the risk to EURUSD from a further repricing of the Fed. The RBNZ is an unlikely candidate to signal tighter policy as the slowdown in migration intensifies the downturn in housing and argues against a policy response to upside inflation risks from minimum wage increase etc.
The RBNZ is therefore expected to stay on the sidelines through 2018 in the face of the institutional changes and countervailing fiscal effects.
Options trade tips:
The 3m window KO halves the premium compared to a digital call.
Long a 9m 1.80 EURNZD digital call with a 3m 1.80 window KO. Paid 17.5% in late November. Marked at 19.04%.
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -33 levels (which is bearish), while hourly EUR spot index was at 35 (bullish) and NZD displays 93 (bullish) while articulating (at 09:46 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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