Before December it would have been considered far too premature for the Fed to be talking about reducing the balance sheet. However, that is the discussion the Fed is now set to have at the January meeting. Jerome Powell said that there are not any immediate plans to reduce the balance sheet, but it will be faster than last time. Goldman Sachs now see the Fed making four, not three, rate hikes this year. How quickly conditions can change! Last year there were times when the Fed did not see any interest rate hikes until 2024, so you can see how hawkish the Fed has shifted now due to inflation concerns.

Other key events from the past week

  • USD: Balance Sheet reduction, Jan 11: The Fed is projecting 3 rate hikes this year. The USD was able to sell off lower after Fed’s Powell was able to push back the timeline for discussing the shrinking of the balance sheet beyond that of the most hawkish Fed speakers.
  • JPY: BoJ still favours weak JPY? Jan 11: Governor Kuroda said on December 23 that the benefits of a weaker JPY still exceed its demerits. Watch out for the BoJ’s position on whether it is still happy with a weaker JPY as Japanese households feel the pinch of a weak JPY.
  • USD: Inflation data, Jan 12: Expectations heading into the CPI print were for a headline figure of over 7%. This would be the highest level since 1982. In the end, the headline did come in at 7.0% and the core reading was at 5.45% vs 5.4% expected. Inflationary concerns are still of key importance for the Fed.

Key events for the coming week

  • Risk: China’s GDP, Jan 17: The GDP print from China has the capacity to ignite a risk-off move. If GDP surprises to the downside and China maintains its Covid-zero policy then watch for that to result in risk assets being sold.
  • Seasonal trades: Gold seasonals? Jan 18: Gold still has great seasonals in place that is usually down to physical demand for China’s lunar New Year. Will re-al yields fall and help lift gold again? See the strong seasonal pattern here. 
  • AUD: Labour data, Jan 20: The RBA is acutely focused on labour data. If we see the print exceeding expectations this is another reason for the RBA to start turning more optimistic about the economy and could lift the AUDJP pair higher. However, if the risk tone is negative that is a headwind for AUDJPY.

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