Get ready for a thrilling ride as we dive into the world of FX markets and their intriguing moves! The dollar's dominance may be facing a challenge as FX markets start to predict rate hikes across the globe.
As we approach the end of the year, FX markets are looking ahead to 2026 and making some bold predictions. Beyond Japan, markets are now pricing in rate hikes for Australia and Canada, and even the eurozone might be on the horizon after some intriguing comments from the ECB's Isabel Schnabel. But here's where it gets controversial... will these hikes impact the mighty dollar?
Let's delve deeper into the USD story. Aside from the hawkish Bank of Japan, the market is predicting a full 25bp hike next year for countries like Australia, New Zealand, and Canada. Schnabel, the European Central Bank's official, seems open to this idea, too. If the Federal Reserve remains dovish (we'll know more on Wednesday), a shift in overseas policy rates could further weaken the dollar in 2026. This week, central bankers from Australia and Canada will share their insights, adding to the excitement.
In other news, China's export performance continues to surprise, indicating strong global demand despite tariff volatility. However, China's domestic demand remains a concern, and trading blocs might start raising protective barriers if reciprocal demand doesn't increase.
This week, the US data calendar features JOLTS job opening data and the FOMC meeting. The Fed's decision could be a positive event for the dollar, but the potential nomination of Kevin Hassett as Fed Chair and seasonal factors might limit its upside. For now, DXY is expected to trade within a tight range.
Moving on to the EUR, Isabel Schnabel's upbeat comments suggest that eurozone growth risks could be positive. She highlights three potential areas for upside surprises: household consumption, private sector investment, and government spending on infrastructure and defense. These remarks, coming from a hawkish official, might be seen as a counterpoint to those favoring a rate cut. Schnabel's comfort with markets pricing an ECB rate hike adds fuel to the fire.
In the CEE region, we're witnessing another test of the forint's resilience. This week brings more inflation data and central bank decisions. Today, Czech industrial production data is expected to show stagnation, while Hungarian inflation is predicted to fall. On Wednesday, we'll see Turkish industrial data and final Czech inflation figures. The Central Bank of Turkey's rate decision on Thursday could be a game-changer, with the potential for a larger-than-expected rate cut.
Romanian inflation data on Friday is expected to show a 9.7% YoY reading. CEE currencies continue to be influenced by negotiations between Ukraine and Russia, although the positive momentum has faded. Progress in these negotiations could be a boost for CEE currencies, especially with EUR/USD's recent bullish move.
The rates market is turning dovish after a National Bank of Poland rate cut and low Czech inflation. Hungarian inflation data this week is expected to confirm this trend, pushing markets towards more rate cut pricing and undermining FX strength. Overall, we remain neutral for this week, awaiting geopolitical and Fed guidance.
EUR/HUF might face some upward pressure after Fitch's rating outlook downgrade and expected lower Hungarian inflation. Without progress in the Ukrainian situation, we could see a test of the 383 level in the coming days.
Lastly, let's talk about Brazil. Political volatility hit Brazilian assets on Friday when former president Jair Bolsonaro endorsed his son, Flavio, as a right-wing candidate for next year's election. This move challenges the emerging consensus around a more moderate candidate, Tarcisio de Freitas. While it's early days for the election, shorting the real comes at a high cost. This news serves as a reminder that local politics can impact even the most attractive investment opportunities.
We forecast USD/BRL at 5.50 next year to account for this political uncertainty.
Remember, these markets are dynamic and ever-changing. Stay tuned for more updates and feel free to share your thoughts and predictions in the comments! Are you team hawkish or team dovish? Let's discuss!
