FX Weekly Preview: Dollar Squeeze A Growing Concern, But Longer Term Bears Likely To Temper It
Submitted by Shant Movsesian and Rajan Dhall MSTA
Over the past week, the argument that the tax reform aimed at corporates specifically could prompt a period of USD repatriation – much like an amnesty – has been growing in sentiment, and whether one believes in this, remains an upside risk we shouldn’t ignore. Since the Fed’s much anticipated rate hike, we have seen a moderate hit on the USD reversed in full, but put in perspective, the overall ranges traded so far have been modest to say the least. We also shouldn’t ignore the time of year, where liquidity is not at its best, though has been enough to send the major indices on Wall Street to new record highs. There was a time this would have sent USD/JPY soaring, but it hasn’t, but times have changed and most of us can see that global growth reflected in the stock markets is a far cry from that seen through wage growth and inflation.
There has also been some focus on cross currency basis, turning negative to further signal year end USD demand and into early 2018, which can be tied-in in part to the repatriation story above. Some will attribute it to regulatory pressures in Europe (derivatives market) as well as Japan, and although immeasurable for the most part, is a risk worth noting given our focus for the week ahead.
As such, we look for concurrent moves in EUR/USD and USD/JPY, with a move in the former through 1.1700 likely to correspond with a USD/JPY push for 113.50-114.00 again. Once again, in light of the illiquid period ahead, these are merely risks we are highlighting, and given where the respective spot rates ended up on Friday night, it is noteworthy risk at this stage.
Through 1.1700, EUR/USD will test the band of support seen in the 1.1650-1.1550 area, where the longer term interest based on the Euro zone recovery continues to carry favour. Based on the rising PMIs in Germany and other leading states, notably France, few can argue that there is momentum here, but this is largely priced in for now as we can see in some of the relative performance in the cross rates. Even a supported EUR/CHF rate is struggling at 1.1700.
In the final week into Christmas, we should see the EU wide inflation reading for Nov confirmed at 1.5% while the German IFO survey will likely continue with a healthy business climate. Italian industrial production and orders later in the week will give us some insight into whether the rest of Europe is keeping up pace, but all of the above – as we have already alluded to – will do little to materially better the EUR position for now.
USD/JPY in the meantime survived the short lived post FOMC sell off, in a move which was seemingly pre-empted as ‘dovish hike fade’, but that lasted for all of a day at best. We held 112.00 on the downside, with 111.50-60 the strong base lower down, and despite the longer term bias for USD weakness and a return through 110.00 at some stage, the consolidation phase looks set to continue with 114.00-115.00 yet to be retested in any substantial way.
The BoJ meeting towards the end of the week will again maintain current policy stance aimed at getting inflation back to 2.0% target, so the only interesting potential is of any dissenters to the persistent asset purchasing and an eventual unwind. Domestic data is improving, albeit slowly, but the central bank have their mandate – the markets have their own take, and it is one which looks likely to test the BoJ’s tolerance for JPY strength at some point down the line. When rather than if!
In the UK, GBP looks capped now that the EU-UK passage to the round of talks on trade have been secured. Once again, the agreements made to facilitate this are nothing more than a ‘statement of intent’ – as David Davis put it – so we are now at the crux of the negotiation, and this should start to weigh on some of the (blind) optimism which has driven GBP to better levels across the board. To temper this, we are not advocating a return to the doom and gloom scenario, rather some moderation which would put Cable back to levels closer to 1.3000-1.3100 rather than creating a platform for a move through 1.3500-1.3600 for 1.4000 as some have suggested. It is all sentiment here for now.
EUR/GBP has found good support in the mid 0.8700’s, but we also see limited scope for an aggressive push through 0.9000 unless Brexit cordiality breaks down completely. On the UK economy, notable was the lack of positive response to the bumper spending results seen for Nov. Naturally there will be a discounting factor in pre Xmas buying incorporating the Back Friday sales, and next year’s numbers will make for a far better reading on consumer appetite and more importantly disposable income. The final Q3 GDP print is the only notable data point next week including business investment numbers.
We also saw some reprieve for the AUD and NZD last week, with both consistently getting hammered into their recent lows with very little breathing space. NZD had recovered first, again, largely down to over-exhaustion and traders throwing the towel in, so suggestions that the market have eased up on their bearish sentiment on the new coalition government look a little premature, not to say ‘convenient’ at this stage. This is not to say that the recovery does not have a little more to run, and could be generated through the EUR and GBP crosses, with over-extensions here – much in the same way as we have seen in EUR/AUD and GBP/AUD – redressed into year end at least.
Lots of data in NZ next week, with more business confidence surveys (ANZ), current account and trade all leading up to Friday’s Q3 GDP number.
Little in the way of stats to consider in Australia, so markets will focus on the RBA minutes and what the central bank take is on the economy. With bearish sentiment emanating on low wage growth, low inflation and high household debt, the AUD got a welcome boost from a 60k+ rise in jobs, which keeps hopes alive for the Phillips Curve kicking in. Little evidence of that in the US, but hope is hope and the AUD has weakened enough for now, with 0.7500 proving a strong base. AUD/NZD is now the one to watch, where we took out pre 1.0900 demand, but the late Sep lows ahead of 1.0800 remain intact as yet.
CAD traders have some hard data to feed on rather than hang on every speech and reported rhetoric from the BoC. Accused of a hard turnaround from the post rate hike hawkishness, the market was once again wrong-footed on governor Poloz’s statements this week, who stated that he saw the need for less stimulus going forward. The CAD push up was brief however, and found fresh buyers looking for an eventual push through 1.2900 based on the retrenchment in CAD rates. The jobs report for Nov was strong however, and if CPI, retail sales and ultimately GBP can can improve on the moderate expectations (0.2% growth seen for Oct), then perhaps USD/CAD can survive a push on the heavily offered 1.2900-1.3000 area. Fear of long(s) liquidation by some banks suggest this could facilitate a move through the above mentioned area, but this assumes intent, which again, is immeasurable. We could also say this about strong positioning in the market for (long) EUR’s!