"USD: A Shift in Strength. Neutral.

We believe USD could see a setback in the fourth quarter. Stabilization in China should provide room for investors to feel more comfortable about the EM growth story. With markets positioned heavily long USDs against EM, this is likely to be enough to keep the EM rally against USD going for a little longer. Signs that the accumulated USD strength year-to-date are hurting the US economy, as seen in last week’s payrolls, could contribute to further EM support.

EUR: EUR Still Driven by Risk. Bearish.

In the current environment of a risk retracement, we would expect EUR to be an underperformer given its increasing use as a funding currency and therefore its inverse relationship with risk. Headlines that the ECB will frontload QE are likely to add to pressure on EUR. The main risk to this view is that the risk rebound itself pushes back the timing of further ECB easing, prevent EUR from breaking meaningfully lower.

JPY: Trading the Range. Neutral.

JPY is likely to be flat to weaker in the current environment. The risk backdrop is not supportive for the currency, given its inverse relationship with risk. That said, the BoJ kept a relatively hawkish stance at its latest meeting, and we believe that any further easing is likely to be fiscal rather than monetary. This should offer some support to JPY, and as a result, we would expect JPY to outperform other funders such as EUR.

GBP: Dovishness in the Price. Neutral.

Watch: Trade, CPI, Employment Report We believe GBP could trade in a range. Recent data has been soft, suggesting that the first rate hike may be later rather than sooner. Indeed, the central bank set a subdued tone on inflation in its latest minutes. However, markets are already pricing in a delayed UK hiking cycle, and we don’t see this getting pushed back further. One point of interest from the BoE minutes is an enhanced focus on GBPUSD, rather than the TWI, as a driver of inflation. 

AUD: Time for Relief. Bullish.

The current risk environment has been driven largely by a stabilization in China, and AUD is likely to be the key G10 beneficiary of this improvement. The RBA left policy unchanged and maintained its neutral bias, and our economists see a cut in November as increasingly unlikely. We remain constructive on the currency in the near term and maintain long AUD exposure."