WEEK AHEAD: USD UPSIDE RISK INTO PAYROLLS, SELL AUD RALLIES - CREDIT AGRICOLE

This week’s tragic events in Brussels had an only temporary impact on risk sentiment, which has been reflected in our risk index remaining broadly stable. This may not come as a major surprise as geopolitical tensions are generally not treated as sustainable market drivers. Nevertheless, caution may still be warranted, especially as markets under-price the risk of the Fed hiking twice this year.

Should next weeks’ US data make a case of further normalising investors’ central bank rate expectations to the benefit of the USD, investors’ demand for risk assets may fall, at least temporarily.

This is especially true as major central banks such as the ECB and BoJ are unlikely to consider additional stimulus measures anytime soon. In the case of the ECB, and even if the single currency’s last few weeks appreciation may have prevented inflation expectations from rising, more time is needed to evaluate the impact of the latest policy steps on the economy. Should the above outlined conditions hold true, it will be about global growth expectations to drive sentiment. Hence, next week’s Chinese PMI releases will attract attention.

When it comes to commodity currencies such as the AUD, we favour selling rallies. While a stronger USD may dampen commodity price developments anew, intact uncertainty related to Asia is likely to prevent investors’ RBA rate expectations from rising further.

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What we’re watching:

USD – Next week’s business activity and payrolls data should keep Fed rate expectations and the USD supported.

EUR – We do not expect incoming inflation data to have any meaningful impact on rate expectations and the EUR.

CAD – Growth data is unlikely to trigger bigger changes to rate expectations and the CAD. We expect oil price developments to remain key.

CHF – The franc should be driven still by external factors such as risk sentiment rather than domestic data like the KOF leading indicator. However, low safe haven appeal may keep it an underperformer against the JPY