What's next for USD? - Nomura

"The FOMC delivered the market a hawkish surprise this week, with the 2017 dots signalling three hikes next year, up from the two signalled in September. USD strength followed, and we think USD/JPY has the furthest to run.

With the BOJ remaining committed to its yield control policy, the widening rates differential is likely to be highly supportive for USD/JPY. Risk sentiment reaction remains important for the cross, but so far seems contained.We are not expecting any surprises from the BOJ next week, and with low easing expectations market reactions should be muted.

We expect USD to outperform over 2017, but unlike 2016 it is likely to be driven more by the fiscal purse rather than monetary policy easing. Stronger global growth momentum than a year ago should also reduce the likelihood of a risk-off environment that caused the position unwind earlier this year.

The "Trumpflation trade" is still in full swing, and as we write this USD crosses are breaking above key levels at an impressive pace.

We expect this to continue into the new year and more so if President-elect Trump passes legislation at a faster pace than the market is expecting. Politics will likely continue to dominate the headlines next year, and we expect EUR to move below parity and GBP to reach new lows.

CAD is likely to outperform AUD and NZD, while SEK and NOK are likely to outperform CHF as their central banks turn more hawkish. Finally, we believe foreign bond flows could have a greater impact on EUR going forward, as the higher FX hedge costs for euro area investors could mean a stronger FX impact from those outflows".

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