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MONETARY POLICIES

Unfitting Policies Will Not Save the Euro-area or Japan in 2015

unfitting, policies, will, not, save, Euro, Euro-area, Japan, 2015, fx trader, forex, market, Abenomics

In 2015, the markets will remain focused on the Fed policy normalization, which will perhaps be the broader market mover as the USD and US yields will inevitably impact the global financial markets including G10, high-beta currencies, commodities and metals. The new theme will however be the Euro-zone jumping in a Fed-like asset purchase strategy with meager probability of success given the unfavorable eco-political environment in the Euro-zone for such implementation. In Japan, the New Year could witness the collapse of Abenomics. We warn from the very beginning: 2015 will be no better than the confusing and chaotic 2014.

UNITED STATES

In the US, the next year will mark the beginning of the so-expected “policy normalization”. After having brought its total assets to a record 4.5 million dollars in 2014, the Fed ended its third Quantitative Easing program in October. The next logical step will be the rate normalization, however the Fed is not in a hurry to start the process. Although the US economy added in average well above 200K nonfarm jobs on monthly basis through 2014, the “slack” in the labor market and moderate wages growth have been an important concern for the Fed. In addition, the soft inflation reads and over 50% slide in oil prices still give the Fed flexibility it needs to wait for the opportune timing before normalization begins.

The US treasury yields have massively failed to pick-up through 2014. Instead of advancing to 3-3.5% as anticipated, the US ten year treasury yields saw 1.86% in October, leaving the rate markets sizeable room before seriously pricing in the first rate hike. Yet sooner or later, the steepening in US yields and stronger US dollar will materialize and the New Year will no doubt bring luck to USD-bulls. The timing of the first rate hike is anticipated by July 2015.

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