What to expect from FX for 2016

Picking winners 12 months out is extremely difficult, but there are some trends and themes that are certainly worth paying attention to. The euro vs the US dollar is one pair that I will be looking at as I believe we will see it reverse much of the slide we saw in 2015. The Fed have talked the market into believing interest rate liftoff is upon us, but I believe this only opens the door for disappointment. The Fed have said rates will rise slower than expected and I do not doubt them on that. The US dollar will likely weaken as the glacial pace of interest rate rises will not live up to the market’s expectations, and any rate rise may affect adversely US growth.

That brings us to the euro. As we have seen, the ECB are still willing to expand stimulus, but the need will diminish. 2015 has ended rather positively for EU businesses, with growth, spending and even hints of inflation returning. I believe this trend will continue into 2016 which will be seen in the ECB’s monetary policy actions. The dovish rhetoric will slowly turn to neutral and the market will realize the euro has been oversold. I would not be surprised to see the euro return above the 1.20 level on EU strength and USD weakness.

Anyway the only question the Euro for 2016 is whether parity will be achieved, and longer term bearish sentiment remains firmly in place despite Mario Draghi's recent failure to increase the ECB's bond buying program which the market had been expecting, and has led to a strong move higher in the short term.

For both the British pound, and the Aussie dollar, both currencies continue to remain bearish, with the first falling on weak economic data and likely to continue so, with the latter given a helping hand from the RBA and the continued weakness in commodities.

The Canadian dollar too is likely to remain under pressure for as long as oil prices continue to decline.