Euro Dollar Rate Forecasts for 2014-2015 - page 33
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Is This The Beginning Of The End Of The USD-Uptrend? - Credit Agricole
The question is whether this is the beginning of the end of the USD-uptrend and, by implication, the end of the de-coupling trade as we know it.
To be sure, it is getting very difficult to be bullish USD. Indeed, the factor that has kept the longUSD trade going in the face of fading prospects for Fed lift-off and ever flatter glide path for rates was the belief that the US growth outlook is superior to the rest of the world and that wage growth and inflation will pick-up on the back of tighter labour market conditions. This belief was shaken pretty badly last week. In the near term, markets may find some solace in the robust non-manufacturing ISM for September due later today. In addition, the September Fed minutes on Wednesday will likely highlight that the decision to delay lift-off was a very close call. It may take more than that to restore market confidence in the de-coupling trade, however, and the USD may continue to struggle to perform for now.
All that said, we think it is premature to call for the end of the USD rally. Indeed, global risk aversion remains elevated and could get worse if the upcoming IMF meeting of global central bankers and finance ministry officials over the weekend fails to send a clear signal that more policy action to combat the global growth slowdown is imminent. In particular, all eyes will be on the Chinese officials with investors hoping for targeted fiscal stimulus to boost domestic demand in the world's second largest economy. Potential disappointments could fuel risk aversion yet again and boost the USD against risk-correlated and commodity currencies. We further expect that the RBA to keep rates unchanged on Tuesday but signal growing concerns about the outlook for China and the global economy. In turn, renewed rate cut bets could undermine AUD in the near term.
Another reason not to write off the USD-rally completely is the fact that we expect the BoJ and the ECB to continue to ease from here. Indeed, CA economists have frontloaded their call for BoJ QE to October 30. Turning to the ECB, we suspect that is may take a few months before we see QE extended. That said, the latest drop in inflation and inflation expectations likely did not go unnoticed at the Governing Council and could feature prominently during President Draghi's speech in Frankfurt on Tuesday. To the extent that this encourages market speculation of more QE, it could add to headwinds for EUR ahead of the October 22 ECB meeting.
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EUR: What Will The ECB Do? - Credit Agricole
Eurozone inflation dipped below zero again in September, dragging inflation expectations lower.
All eyes will be on Draghi and his colleagues this week as investors try to gauge whether the latest batch of disappointing data has increased the likelihood of QE extension. Any signals to that effect could encourage renewed EUR weakness given the impact that QE1 had on the currency.
One way to gauge the impact is to look at the FX price action when QE-related EUR-outflows were the heaviest. A look at the Eurozone BoP data suggests that the outflows intensified significantly between July and December 2014, ahead of the QE announcement in Jan 2015. EUR/USD dropped by c.15bf over that period.
While the impact of any QE extension (expected in Q116) should be more muted given that global bond yields are now lower, implying less scope for EUR-funded carry trades, the prospects for more QE will keep the risks for EUR on the downside.
EUR/USD: Further Choppy Trading; Levels & Targets - UOB
EUR/USD edged above the top-end of the expected 1.1160/1.1275 sideway trading range (high of 1.1289) before dropping sharply to close near the day’s low, notes UOB Group.
"As indicated yesterday, despite improvement in momentum, only a clear break above 1.1330 would indicate the start of a bullish phase," UOB adds.
"The sharp drop form the high of 1.1289 yesterday suggests that the current neutral consolidation phase is still intact. In other words, further choppy is still expected, likely within the key levels of 1.1115 and 1.1330," UOB projects.
A Floor Below USD At Current Levels; Buy Dips - Credit Agricole
Risk sentiment has been improving further in Asian hours, still on the back of capped Fed rate expectations. Yesterday’s weaker than expected ISM services PMI fuelled investors’ expectations of the Fed refraining from tightening monetary policy this year further. Even if the latest data has decreased the probability of the Fed considering higher rates this year, December should remain an option. This should hold especially true if risk sentiment continues to stabilize in the weeks to come. It must be noted too that inflation expectations as measured by 5y forward breakeven rates failed to break lower of late.
As a result to the above outlined conditions we see limited scope of further falling Fed rate expectations from the current levels. This in turn should put a floor below the greenback at around the current levels, in particular against the EUR.
This is especially true as muted Eurozone growth and price developments have increased the risk of the ECB considering a more aggressive monetary policy stance soon.
Ahead today it will be quiet in terms of data releases. If anything, US trade data and Canada’s Ivey PMI will attract attention. View wise we stick to a positive USD view. As stressed above we anticipate only limited room of further falling Fed rate expectations from the current levels. This combined with the ECB’s or SNB’s more dovish monetary policy stance should keep the greenback a buy on dips.
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Long EUR/USD Remains A Risky Trade; Here Is Why? - Credit Suisse
Credit Suisse remains suspicious of EUR/USD capacity to sustain a rally despite the sharp decline in US rates.
"We suspect the ECB will continue to jawbone it lower whenever it pushes beyond the EURUSD 1.15 level as there are enough disinflationary forces still in evidence in the euro area to make this a sensible policy," CS argues.
"Looking at the Volkswagen crisis for example, there is talk both of sharp cuts to investment and auto price wars that could shave a further 0.1% off euro area HICP. The macro data flow is not up-to-date enough to show these potential developments," CS adds.
"With the market inclined to believe the idea that the ECB can and will do more easing if necessary, and with the 22 October ECB meeting on the horizon, long EUR still seems a risky trade," CS warns.
EUR/USD: Rebound Within A Flag; USD/JPY: Sideways Within A Triangle
Corrective rebound in EUR/USD is evolving within a flag and a test of 1.1565 is not ruled out, says SocGen.
"However, a move above will be needed to signal a test of weekly upward channel at 1.1875. 1.1085 is likely to hold short term retracement while flag limit at 1.0940 will decide if a revisit of 1.05/1.04 happens with 1.08 as intermittent target," SocGen adds.
Turning to USD/JPY, SocGen notes that after facing stiff resistance at multiyear trend (126), USD/JPY has pulled back and achieved graphical support at 118.20.
"The pair has confirmed a double top suggesting possibility of further correction towards 115.50/114. A break below would instigate an extended retracement. 122 should cap upside while 126 remains a key resistance," SocGen argues.
I don't think that we shall see the 1.1000 any time soon
Rates Higher 'Later This Year': Fed Williams
San Francisco Federal Reserve (Fed) President John Williams on Thursday repeated his earlier stance that the interest rate would be lifted "sometime later this year," mentioning near-full employment and his expectation that inflation will trend higher.
San Francisco Fed president spoke about the US economic outlook at the Spokane Business and Community Leaders’ Luncheon.
More and more US employers will find it harder to hire workers, and that will allow people with part-time jobs who really want full-time work to be able to get it, Williams said in his speech, arguing that the labor market is tightening, and the central bank should begin raising rates later this year.
He repeated his view that as much as 80% of the decline in labor force participation in the US is due to demographic and other structural factors rather than cyclical factors that the Fed can actually affect.
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USD Correction to Broaden; Sell Tactically - Morgan Stanley
In its weekly note to clients, Morgan Stanley discusses its current outlook and strategy for trading the USD.
EM rally has legs: "With the help of rebounding risk appetite and rising commodity prices, we expect the EM rally to gain momentum. The detailed read of August trade statistics suggests that rising US imports ultimately mean higher Asian exports. Better Asian export data should help to contain capital outflows, which allows for greater control over monetary conditions. China cutting its RRR and interest rates should boost risk appetite further.
At the same time, markets may put fears of a quick pace of Fed tightening aside. In September, the Fed was appropriately cautious by keeping rates on hold amid low inflation expectations. Markets may anticipate a relatively flat US rate profile going forward, which should take some wind out of USD’s sail," MS argues.
Slowing repatriation: "Nonetheless, our strongest argument for USD coming off from here is found in the analysis of flows. USD has risen on repatriation flows coming on the back of EM portfolio liquidation. Seeing EM portfolio outflows for 11 consecutive weeks (as per our daily EM flow tracker) is unusual, indicating that holdings have been reduced materially. A slight improvement in EM’s macro outlook may lead to a good rebound as investors reassess relative investment returns, especially given the higher yields being offered," MS adds.
Selling USD tactically: "We have removed all USD long positioning from our Strategic FX Portfolio. We tactically position for USD to lose another 5% from current levels, implying a decline in the Fed’s broad TWI to 113/114," MS advises.
MS runs a short AUD/USD position in its portfolio targeting a move to 0.71.
They pulled the "correction" under our noses - we were used like buffers