Weekly forecast - page 21
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USD: Further Gains Expected. Bullish.
We increasingly believe the USD is moving back to its long-term bullish trend, driven by two factors. First, the closing US output gap and its implications on monetary policy should move rate and yield differentials in favour of the USD. Second, should global yield curves continue steepening as inflation picks up,volatility could rise and risk appetite could get hit, resulting in USD-supportive repatriation flows. We expect USD strength to be most pronounced against low-yielding currencies (low-yielding AxJ, JPY and SEK) while high yield EM currencies with good fundamental stories may stay relatively resilient.
EUR: Stay Strong on the Crosses: Neutral.
The latest ECB meeting did not reveal any new information and put all attention on the December meeting instead. EURUSD break below the Jun low of 1.0913 could open downside to the February/March low of around 1.0820. On the crosses, however, EUR is likely to remain supported. Should global and EMU inflation continue rising, ECB tapering talk could come back into focus and the current rate cut priced by the markets may be reduced, supporting the currency. In this scenario, global yield curves may also continue steepening, which could hit risk appetite, providing further support for EUR crosses.
JPY: Use USDJPY Dips to Buy*. Bearish.
We expect further USDJPY strength and view the current setback as a buying opportunity. With the BoJ's yield curve management and steepening of global yield curves, financial institutions' profitability may improve over time, increasing their willingness to lend domestically and abroad which will weaken the JPY. Market consensus remains bullish JPY with long positioning reaching extreme levels. Should sentiment start to shift, an unwind of these positions could generate a significant reversal in USDJPY to the upside. Additionally, given the increasing hedging costs, Japanese investors may now invest abroad on an FX-unhedged basis, further weakening the JPY.
GBP: Corrective Rebound. Neutral.
We changed our forecasts to expect more GBP weakness in coming quarters and little recovery next year. However, we expect some short-term rebound due to the market's large short positioning and signs of the government rethinking its hard stance on Brexit, including allowing Parliament to vote on Brexit negotiations. We think the improvement in the news flow gives GBPUSD upside potential to 1.2650, where we would sell again as investment weakness and political uncertainty are likely to weigh on GBP in the medium term. This week, we watch GDP but note that any positive surprise will provide short-lived support for the currency as GBP is predominantly driven by politics currently.
CAD: Turning Neutral. Neutral.
In the latest meeting, the BoC revised their inflation and growth forecasts down and changed their wording on inflation risks to be "roughly balanced", which was less dovish than markets expected. However, Governor Poloz later said that the bank actively discussed the possibility of adding more stimulus, though it would require a shock or series of shocks for them to ease further. We think this means the Bank is willing to act if the economy takes another dip, but would need shocks such as a significant drop in oil, severe slowdown in the US economy or a US presidential outcome that could change NAFTA for them to deliver more easing. These scenarios look unlikely for now, therefore we turn neutral on CAD.
AUD: DataWatching. Bearish.
AUDUSD has reversed after reaching the upper end of its trading channel following the weak September labor market report, giving it some more room for correction. With mining investment staying weak and the housing market set to slow down, the RBA may need to cut rates further to stimulate the economy. A further steepening of global yield curves and increased pricing of Fed hike probabilities could also hit risk appetite, pushing AUDUSD lower. This week, all eyes will be on CPI and new home sales. Should CPI follow the global trend in inflation and print stronger than expected, AUD could receive a boost but we would use the rally to sell. Accordingly, we add a limit order to sell AUDUSD in our portfolio.*
NZD: Tactical Short*. Bearish.
NZD has the largest potential for correction within G10 in an environment of USD strength and steepening yield curves, in ourview. The RBNZ changed its most recent statement very little despite improving growth data and milk prices and also pointed to slowing house price appreciation. Nonetheless, we believe only an aggressive easing cycle will push NZD substantially lower and we won't get more clarity on this until the November MPS. Inflation remains low, but even if the RBNZ does small amounts of easing, it is difficult for the central bank to weaken the currency in a time when markets are looking for anything high yield. What can push NZD lower for now is a fall in risk appetite or Fed rate hikes.
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EUR/USD Into Next Week's FOMC: Bearish Targeting 1.0775
Renewed upward momentum for the US dollar will be tested in the week ahead.
The FOMC will meet in the week ahead and the updated statement could include a clear reference that it will decide on the appropriateness of a rate hike in December.
The latest public opinion polls will be in focus ahead of the looming Presidential election. The polls would have to shift materially in favour of Donald Trump to undermine the US dollar. The euro has derived little support so far from evidence of stronger economic growth momentum in the euro-zone.
In contrast, ECB taper concerns are having more impact on the eurozone bond market. If the sell-off in the euro-zone bond market accelerates it could temporarily lift the euro similar to in Q2 of last year.
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Week Ahead: FX Markets Into RBA, BoJ, FOMC, And BoE
Investors have several reasons to worry about a potential taper tantrum. Indeed, the next Fed hike is drawing near (we think December rather than November); concerns about a BoJ and ECB taper linger, and stabilising commodity prices are supporting realised and expected inflation across G10. The fear is that an aggressive fixedincome selloff accompanied by a bear steepening of global yield curves could trigger a spike in risk aversion. Coupled with intensifying demand for USD-funding into year-end, this could spell out trouble for less liquid, risk correlated G10 currencies and liquid USD-proxies like EUR and JPY.
We believe that any taper tantrum angst is premature, however. Next week’s Fed meeting should make an explicit reference to a rate move in December but there seems to be less scope for aggressive tightening of US financial conditions given that the implied probability of a hike is already close to 75%. We doubt that there will be a sustained risk selloff either, especially if the non-farm payrolls and ISM data underpins the constructive outlook for the US economy and adds to the recent stream of positive economic surprises from around the world. Next to the Fed and US data, more evidence of growing demand for USD-funding, reflected in widening of EUR-USD and JPY-USD cross currency swap rates, and elevated USD/CNH rates, should keep USD supported.
The BoE’s inflation report should attract some attention next week, not the least given that some analysts are still calling for a rate cut. We expect the MPC to keep policy unchanged and link any prospects of further easing to the path of the GBP, which according to Governor Carney has depreciated ‘substantially’ more recently. Data releases as well as indications that the UK government would pursue a somewhat ‘softer’ version of Brexit could also help GBP consolidate more broadly in the coming days.
Also, next week, we expect both the BoJ and the RBA to keep their policies unchanged. The former should alleviate recent market concerns about an imminent taper that was fuelled by a drop in the 10Y JGB yields to below zero. This together with the persistent steepness of the JGB yield curve should keep Japanese stocks and USD/JPY generally supported. The RBA could revise up its inflation outlook and dash hopes for further easing from here, helping AUD regain more ground. Demand for carry trades could continue to support the AUD in the absence of sustained tightening of global financial conditions.
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Tech Targets: EUR/USD, GBP/USD, AUD/USD, NZD/USD
EUR/USD: Neutral: Rebound has scope to extend to 1.1040.
The current rebound in EUR that started last week is gaining momentum and further extension seems likely. However, at this stage, a sustained move above the major 1.1040 resistance is not expected. Overall, this pair is expected to stay underpinned unless there is a move back below the strong 1.0890 support.
GBP/USD: Neutral: In a 1.2080/1.2350 range.
The outlook for GBP is viewed as neutral from here and we expect further sideways trading within a broad 1.2080/1.2350 range.
AUD/USD: Neutral: Pull-back like to probe the 0.7540 support.
While the outlook for AUD is still deemed as neutral, the sharp pull-back from last week’s 0.7705/10 high appears to have scope to extend lower and probe the major 0.7540 support. At this stage, a clear break below this level seems unlikely. On the upside, only a move back above 0.7660 would indicate that the immediate downward pressure has eased.
NZD/USD: Neutral: In 0.7080/0.7210 range.
The current neutral consolidation phase appears incomplete and further range trading seems is expected, likely within a 0.7080/0.7210 range.
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Citi Trade Of The Week: Buy USD/CAD
Currency investors should consider buying USD/CAD this week, advises CitiFX in its weekly FX pick to clients.
"Overall our bullish USDCAD view this week is driven by several factors: oil, potential risk-off across markets, US & CAD employment.
With Poloz and Wilkins both speaking, there is chance for qualitative risk driving a weaker CAD as well.
Tuesday, Governor Poloz delivers a speech on ’25 years of Inflation Targets: Certainty for Uncertain Times. Poloz should discuss the decision to drop the CPIX in favor of three alternative measures of underlying inflation. Q&A and press conference are to follow, so there is risk that the Governor will tack more dovish compared to his recent comments.
In Canada, GDP on Tuesday and the job report on Friday are the data highlights. It is very likely that Canada’s labour report is weak (especially in full time) and stands out compared to a stronger US NFP.
Broadly, we want to point out that markets may be vulnerable to ‘risk off’ or defensive trading. Note on Thursday FX markets broke through the lows in ADXY. Oil is trading below $50/bbl again. S&P is at the lows for September. Italian and Spanish CDS jumped on Friday. These are all signs of further defensiveness(with equitie (with equities being the most critical for a risk/EM view.) This flags bearish risks moving forward.
Over the weekend – headlines were that an OPEC deal remains elusive, which could further weigh on oil prices early this week," Citi says as a rationale behind this call.
Citi recommend buying USD/CAD at 1.3415 with a stop at 1.3305, and a target at 1.3595.*
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Holding Long EUR & JPY Ahead Of The US Elections
The Fed provided little spark to markets with the major dollar indices unchanged the release. The tweaks to the language suggest that the outlook in economic condition warrants another rate hike before year-end. Our base case remains a rate hike next month and we think the market pricing will ultimately move towards pricing in a full hike, bar an unexpected outcome in next week’s US election.
Even so, major currencies continued their consolidation against the greenback, reflecting heightened risks around the election, lofty valuations and possible shifts in positioning. The BBDXY index, for one, is tracking nearly one standard deviation against 2y rate spreads while the tightening poll numbers have boosted the traditional reserve currencies like EUR and JPY.
We expect choppy range trade to persist and still prefer holding long EUR and JPY exposure ahead of the election. This leaves the USD mixed, as strength in trade-sensitive currencies offsets weakness in the reserves.
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USD: Election Results Support USD. Bullish.
The election results reinforce our structural USD bullish view. Three major policy initiatives (fiscal stimulus, trade, corporate tax reform) are likely to be USD positive and the markets focus on reflation should push USD higher against the low yielders, namely USDJPY. We expect the Fed to remain on track and we may finally see a more balanced mix of monetary and fiscal policy, lessening the need for more easing. Certainly we will be focused on policy implementation and upcoming US data but we think the USD is back in its long-term bull trend.
EUR: Bullish on the Crosses. Neutral.
We expect EUR crosses to remain well supported but EUR may have some downside against the USD driven by the rise in US yields, though this downside is likely to be limited as long as the EMU break-up probability does not increase. Trump's surprise win in the US election has put markets' focus back on the reflation theme. As long as the anti-globalisation rhetoric remains subdued, the prospects of rising inflation, supported by the recent tick up in EMU inflation, could bring the ECB tapering debate back on the table, driving EMU yields and consequently the EUR up. The steepening US yield curve may also spill over into the EMU, driving EMU curves steeper which would also support a higher EUR. We continue to expect EUR crosses to trade higher, particularly against JPY.
JPY: Bullish USDJPY. Bearish.
Reflationary impulses support our structural bullish USDJPY view. Fiscal stimulus led yield curve steepening and positive risk appetite make long USDJPY one of our favorite trades. The BoJ's yield curve management ensures that global yield curve steepening pushes rate differentials against JPY. In addition, JPY long positioning has further to unwind. Higher long end US yields may also be accompanied by higher short-term US yields with our expectations for a December rate hike. Lastly, a global fiscal stimulus impulse may push the MoF to take part which, with long term yields pinned, could provide a substantial boost to Abenomics and weaken JPY further.
GBP: Outlook Stabilised for Now. Neutral.
Recent developments have stabilised the near-term outlook for GBP, we think. The UK High Court ruling against the government may, subject to a Supreme Court appeal, give Parliament the right to vote on Article 50, which may reduce the risk of a 'hard Brexit' given majority of the MPs were in support of Remain. Additionally, the EU's Brexit Negotiator Barnier saying the EU's Brexit approach will be "neither aggressive or naïve" added some upside for GBP. The BoE has also shifted from a dovish to a neutral stance, limiting the downside for GBP. Coupled with the potential for the market's large short GBP positioning to adjust, we think GBP could stage a rebound in the near term. Accordingly, we hold on to our long GBPJPY position in our portfolio*.
CAD: Vulnerable to Trade. Bearish.
Trump's threats to renegotiate NAFTA has put CAD back into focus. While not nearly as vulnerable as MXN, we think CAD will underperform as a result. Trade uncertainty at the very least will add to additional risks to the export sector which has been underperforming. Still, the bar for easing from the BoC is high; the latest BoC meeting showed the Bank revising down their outlook but still keeping rates on hold and actually changing their rate bias to neutral (from dovish). Thus, we must watch for the actual implementation of trade policy and as well as upcoming data but we see USDCAD rising from our broad USD view and expect CAD to underperform other commodity currencies.
AUD: Structurally Bearish. Neutral.
We remain structurally bearish AUD but see competing factors driving its outlook in the near-term. AUD has been vulnerable to rising US yields and a stronger USD but is also supported by positive risk sentiment and rising metals prices. In the medium-term, we haven't changed ourview. China's property sector is at risk of slowing in the coming quarters given the authorities are starting to show signs of clamping down on the housing market, which would reduce iron ore imports from Australia. Australia's labour market also deteriorated further in September, which was a concern for the RBA's new governor. This, coupled with mining investment staying weak and the housing market expected to slow next year, means the RBA may need to cut rates to stimulate the economy.. It is difficult to say when China will slow given the inherent uncertainty of its economy so we are comfortable trading AUD short a little too early to manage this risk.
NZD: Range Trading. Neutral.
The RBNZ delivered a hawkish cut yesterday by bringing rates to 1.75% but removing their easing bias and introducing more two way risk for rates in the future. We expect NZD to range trade for now. The growth outlook has improved as have New Zealand's terms of trade. However, NZD remains vulnerable to a hit to risk appetite or higher US bond yields. We don't see much risk of additional rate cuts without a hit to the growth outlook but do see rising risk of FX intervention. The last time the RBNZ sold NZD in large size was 2014 when the TWI was only a bit higher than current levels. It is not our base case but the threat of intervention should limit some further appreciation.
Week Ahead: Investors To Start Taking Profit On USD Longs Ahead Of US Holiday
The FX markets have welcomed the Trump victory preferring to focus on the prospects for fiscal stimulus and reduced political gridlock in DC while downplaying the significance of Trump’s populist and often radical views on migration and protectionism. The rise of Western populism will remain an important driver of G10 FX markets, however. Most recently, EUR has been caught in the centre of the political storm that started with the Brexit vote in the UK and now threatens to engulf the Eurozone ahead of the Italian referendum on 4 December, and the general elections in France, the Netherlands and Germany in 2017.
Political risks should drive price action in the EUR-crosses in the coming days with investors focusing on the outcome of the French Centre-right’s primaries this coming and next Sunday. Indications that Alain Juppe will lead the party into the presidential elections to face the resurgent populist Marine Le Pen could help EUR recoup some losses. Cautiousness ahead of the Italian referendum should continue to cloud the EUR outlook, however. We also suspect that President Draghi will reiterate next week that the ECB can extend its monetary stimulus if needed in December. That could keep EUR under some pressure but support risk sentiment.
USD continues to reign supreme but we suspect that the rally may be getting closer to a point where concerns about a premature and unwarranted tightening in US financial conditions are starting to outweigh the positives related to more upbeat growth and inflation expectations after the Trump win. Next week’s US data calendar may offer little in terms of data releases or Fed speeches to change that. The Fed minutes will be seen as somewhat dated as well. Investors could also start taking profit on USD-longs ahead of the Thanksgiving bank holiday. We took profit on our long USD/JPY position.* (see here)
In the UK, the focus next week will be on the autumn statement, which will detail the Chancellor’s fiscal stimulus plans to boost growth. Investors will likely set the growth-positive impact from lower corporate taxes and growing infrastructure spending against the negatives stemming from growing fiscal deficit and public debt. With many negatives in the GBP price and the UK economic fundamentals still fairly robust, however, the FX markets may choose to emphasize the positives and downplay the negatives, helping GBP consolidate.
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USD: Election Results Support USD. Bullish.
The election results reinforce our structural USD bullish view. Three major policy initiatives (fiscal stimulus, trade, corporate tax reform) are likely to be USD positive and the markets focus on reflation should push USD higher against the low yielders, namely USDJPY. We expect the Fed to remain on track and we may finally see a more balanced mix of monetary and fiscal policy, lessening the need for more easing. Little has changed in the last week to impact our fundamental view around USD, though we are closely watching the Trump transition for indications on actual policy implementation next year. Certainly though, there is scope for the USD move to lose steam in the next few weeks but we maintain our medium term view.
EUR: EURUSD Driven by the USD. Neutral.
EURUSD is largely driven by the USD side, meaning that the pair could move reluctantly lower, seeing 1.04 by year end. However, we think EUR should remain strong on the crosses as Eurozone banks are not increasing foreign lending enough to compensate for the current account surplus, and the higher global inflation environment reduces the need for the ECB to add to QE purchases forever. Eurozone political events are now treated as binary risks for the EUR. We believe the main one to focus on is the French election. This weekend we will be watching for the results of the Republican party primary.
JPY: Bullish USDJPY. Bearish.
CPI Reflationary impulses support our structural bullish USDJPY view. Fiscal stimulus-led yield curve steepening and positive risk appetite make long USDJPY one of our favorite trades. The BoJ's yield curve management should ensure that global yield curve steepening pushes rate differentials against JPY. The BoJ's first fixed-rate bondpurchase operation overnight supports this view as it shows they are willing to defend theiryield curve targets rather strictly in light of global curve steepening pressures. In addition, JPY long positioning has further to unwind. Lastly, a global fiscal stimulus impulse may push the MoF to take part which, with long term yields pinned, could provide a substantial boost to Abenomics and weaken JPY further.
GBP: Outlook Stabilised for Now. Neutral.
GBP has become pretty sensitive to bond curve steepness, explaining why it has outperformed in the broad USD rally. The market is still short GBP so position adjustment and no new negative news from the Brexit negotiations should continue to allow GBP to rebound. We have a tactical target of 1.29 for GBPUSD. We are still long GBPJPY*. Market focus in the coming week will be on the release of the UK government's autumn statement. Not much fiscal expansion is expected but any surprise rise in gilt issuance could push up yields faster than in the US, supporting GBPUSD for now. We are still looking for a rebound to sell into 1Q17.
CAD: Vulnerable to Trade But Supported by US Growth. Neutral.
Trump's desire to renegotiate NAFTA has put CAD back into focus. CAD is not nearly as vulnerable as MXN given a prior free trade agreement which would take effect if the US backs out of NAFTA (though Trump could also choose to back out of this agreement too). However, we think this issue has the ability to turn CAD into an underperformer in the commodity complex as trade uncertainty at the very least will add to additional risks to the export sector which has been underperforming. Still, the bar for easing from the BoC is high; the latest BoC meeting showed the Bank revising down their outlook but still keeping rates on hold and actually changing their rate bias to neutral (from dovish). Furthermore, other policies, such as US fiscal stimulus, should positively impact Canadian growth. Thus, we must watch for the actual implementation of trade policy as well as upcoming data but we see USDCAD rising from our broad USD view.
AUD: Structurally Bearish. Bearish.
We remain structurally bearish AUD but see competing factors driving its outlook in the near-term. AUD has been vulnerable to rising US yields and a stronger USD but has been supported by positive risk sentiment and rising metals prices. In the medium-term, we haven't changed ourview. China's property sector is at risk of slowing in the coming quarters given the authorities are starting to show signs of clamping down on the housing market, which would reduce iron ore imports from Australia. Australia's labour market also deteriorated further overnight which, coupled with mining investment staying weak and the housing market slowing next year, means the RBA may need to cut rates to stimulate the economy. With markets having all but priced out hikes next year and iron ore prices falling again, risk reward favors AUD shorts.*
NZD: Outperformance Vs AUD. Neutral.
The RBNZ delivered a hawkish cut last week by bringing rates to 1.75% but removing their easing bias and introducing more two way risk for rates in the future. We expect NZD to range trade for now but outperform AUD. NZD remains vulnerable to a hit to risk appetite or higher US bond yields, however we don't see much risk of additional rate cuts without a hit to the growth outlook. On AUD/NZD New Zealand much more plausibly faces rate hikes than Australia which implies rate differentials can move in its favor. FX intervention remains a larger risk than rate cuts but still remains unlikely and would only be combating further strength.