Week Ahead: If In Doubt, Stay Long FX Carry Trades - Credit Agricole

Week Ahead: If In Doubt, Stay Long FX Carry Trades - Credit Agricole

23 October 2016, 13:11
Vasilii Apostolidi

G10 FX carry trades are in demand once again supported by abating political uncertainty ahead of the US presidential elections, generally resilient global data and expectations of only cautious Fed tightening from here.

In addition, markets have, for now, shrugged off their fears about ECB and BoJ taper, and reloaded on EUR- and JPY-funded carry trades.

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Last but not least, the initial ‘hard Brexit’ shock seems to be abating and that is helping GBP stabilise while calming market nerves.

The status quo should persist into next week with the upcoming data (US Q3 GDP, Germany’s ifo) unlikely to trigger sustained tightening of the global financial conditions. While markets seem to be more than halfway through pricing in a December Fed move, we doubt that there is a scope for further aggressive front-loading of rate hike expectations before the outcome of the US presidential vote is known. In addition, QE taper fears could remain contained for now as investors await the ECB’s December meeting.

Demand for G10 FX carry trades could continue to prop up AUD and NZD. Potential upside surprises from the Australian CPI or the NZ trade data next week could be supportive as well. USD will remain in demand but with many positives already in the price, the upside maybe less pronounced than in recent weeks.

EUR and JPY may remain vulnerable for now especially if risk sentiment continues to hold up well.  

GBP’s recent consolidation could continue with market nerves calming after the initial ‘hard Brexit’ shock. The further improvement of UK data next week could point at a more balanced BoE outlook ahead of the November Inflation Report and prop up the currency.

Scandi currencies could attract considerable attention ahead of the Norges Bank and Riksbank meeting. No change in the policy outlook is expected from both but the impact on NOK and SEK could differ. In particular, an unchanged Riksbank outlook could highlight that a lot of negatives are in the price of SEK and could help the currency consolidate. In the case of NOK, we sense that some clients are expecting a repeat of the relatively hawkish September meeting, which made NOK the best performing G10 currency last month. A more cautious Norges Bank assessment could be perceived as dovish and stand in the way of further NOK appreciation.

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