US Dollar’s tone remains firm at the start of 2016

The US dollar is likely to remain on a firm tone in the early part of 2016. The Fed is expected to normalize monetary policy with four rate hikes this year, especially with more hawks on the FOMC this year. If US non-farm payrolls come in at/above 200K in Dec15 on Friday, markets may look for the Fed to hike again at the next FOMC meeting on 28 Jan. Conversely, the European Central Bank (ECB) is expected to maintain its dovish tone at its governing council meeting on 21 Jan, but is unlikely to signal fresh stimulus for now. The ECB extended, on 3 Dec, its quantitative easing program by another six months to Apr 2017. On balance, the DXY's rise or the EUR's fall is likely to be more balanced compared to the past two years. 

The Chinese yuan resumed its depreciation since the start of November 2015. The official fixing depreciated against the USD for a second straight year by 5.8% to 6.4936 in 2015. Interestingly, the full-year depreciation for the onshore spot rate was smaller at 4.5% despite closing at the same rate for the year. The offshore CNH ended 2015 weaker at 6.5680 with a full-year depreciation of 5.4%. This was consistent with the 14.9% (YoY) decline in China's exports in Jan-Nov15, the first contraction since 2009. With real GDP growth expected to retreat further from 7% this year, China is not done cutting rates yet. Hence, the tone will remain weak for the CNY. 

Similarly, most Asian countries are also experiencing export recession amidst higher US rates and a weaker CNY, not a healthy combination for their exchange rates. Unless oil prices extend their declines, there will be no offset from high trade surpluses this year. In this regard, pay close attention to tensions in the Middle East. Saudi Arabia has cut relations with Iran after its embassy in Tehran was attacked.