Posted by on November 12, 2017 9:24 pm
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Categories: Australia Bank of England BOE CAD Carry Trade China CPI Currency pair Economy European Central Bank European Union flash Foreign exchange market germany Gross Domestic Product Inflation italy Macroeconomics Norway Portugal Real versus nominal value recovery Reserve Bank of Australia

Submitted by Shant Movsesian and Rajan Dhall MSTA of

USD correction done yet?

After a number of weeks of painfully tight ranges, there is little on the horizon which looks potent enough to warrant a break out.  Has the apathy in global stocks spread into FX? It looks like it, especially when looking at the carry trade.  Watching USD/JPY has been nothing short of tortuous as we currently remain hemmed into a 113.00-115.00 range.  We have been getting used to watching EUR/USD as the benchmark rate to spark off fresh activity across the currency spectrum, but despite the open ‘ended-ness’ of the APP come Jan 2018, the pair is now in a fresh stalemate as bids in the mid 1.1500’s have only served to limit the correction which was so evidently needed once we had reached the first objective at 1.2000.  For USD/JPY, the market is pinning hopes for tax reform to take off, but the chinks are starting to show again with the corporate rate tax cut to 20% set to be delayed until 2019.  As we saw in the aftermath of president Trump’s victory, there seems to be little concern over how these tax cuts are going to be paid for and perhaps move significantly greater concern as to how much they will add to GDP if/when implemented.

Scepticism set in earlier this year once we had pushed above the 116.00 mark, and while the extension stretched into the 118.00’s, calls for 120.00 soon fell flat.  After the move down into the 107.00’s, we have since moved back into the upper end of the 2017 range, but still looking for a move above 115.00.  There was little data to feed off in the US last week, but we have inflation and consumer data in the week ahead which will shed more light on whether the USD run is truly exhausted or not.  Little correlation with rates at the moment, with the 10yr US benchmark backing off 2.50% in recent weeks, but to little effect, but 2.30% has held since then.  

In Europe, as the turmoil in Spain calms down, divisions inside the ECB flare up again, with Germany calling for firmer guidance towards signalling an end to QE.  President Draghi and a number of his fellow members are keen to keep the Euro recovery from fizzling out, so keeping the APP open ended at this stage offers them room for manoeuvre as well as containing another impulsive EUR rally.  On the latter, they have succeeded, but in the mid 1.1500’s, strong buying last week underlined the focus on a longer term recovery.  Little prospect of a surge back up to 1.2000 at this stage, but that is partly down to the USD.  

All the big names from the ECB are due to speak next week – again – but in the steady flow of rhetoric nothing will impact the near term consolidation in the EUR other than a firmer commitment towards and ‘end date’.  Inflation is tailing off again as we are expected to see in the final Oct reading on Thursday, but on Tuesday we get the second reading on Q3 GDP which will need to stick at 0.6% at the very least to underpin the tentative hold in the single currency.  Flash GDP in Germany also out, and mixed readings in factory orders could seen this slip back towards 2.0% annualised.  Italy is closer to 1.5%, but Portugal and Holland are over 3% for comparison, but all from a lower base remember. 

It will be an interesting start to the week for the Pound, as we wait to see how the market reacts to news that around 40 MPs are ready to sign a letter of no confidence in Theresa May.  The PM is really struggling to get a break at the moment, in a government which we should not forget, still hasn’t got majority.  As if fending off the hard Brexiteers and the ‘remainers’, is not hard enough when negotiating exit from the EU, recent departures from her cabinet and constant in-fighting makes here position untenable by the day, and this will continue to weigh on GBP, if not, then when we push on to higher levels, which we did at the end of last week.  

The Brexit talks offered nothing now, indeed perhaps more to be concerned about as Michel Barnier effectively gave the UK a few more weeks to commit to the divorce bill which some papers have suggested will be raised in order to get progress onto the next stage of trade talks.  Optimistic or opportunistic, the longer the EU talks, the more business investment will suffer, so arguments for buying GBP at these levels based on valuation lose credibility by the day.  Were Cable down at 1.2000 or 1.2500, this would carry more weight, but inside 1.3000-1.3500, buyers must be looking for 1.4000+ at the very least, and few can justify that with the rate perspective also dashed after the previous week’s dovish hike by the BoE.  

EUR/GBP is more likely to be range bound in the meantime, but we have continued to test sub 0.8800 with little progress, but 0.9000+ is equally lethargic at this stage.  

Plenty of data though next week, with the latest inflation print on Tuesday, employment on Wednesday and retail sales on Thursday.  Notable are some of the concerns over the UK high street at the moment.  CPI above 3.0% is expected, but the BoE believe it will top out at 3.2% – lets see.  

In Australia, rising employment has been the economic saviour which keeps the hopes of wage inflation alive – as it has in the US.  We get the Oct report on Thursday.  Despite the strong gains in industrial metals price, the AUD has been clearly faltering in recent weeks, and we are not convinced that 0.7600-25 is the low just yet.  What happens when commodity prices adjust, or if the Chinese data fades again?  If the AUD cannot recover at this time, then we cannot rule out a move on 0.7500 just yet, with the market focusing on softer inflation which has seen the yearly rate slip below the 2-3% RBA range, and set to fall further after the CPI re-weighting. 

Industrial production in China is due out on Thursday, but the yoy rate is currently above 6.0%, so expectations for a drop off from 6.6% to 6.3% will likely be dismissed at this stage.  

Nothing of note for NZ however, so focus here will be on any fresh policy announcements from the new government.  RBNZ mandate reform is set to bring full employment into policy considerations, but as we have seen in the Q3 numbers, job gains are moving the right way, so any dovish implications will be held back for now. Indeed, last week’s RBNZ statement was pretty positive on the outlook, with NZD softness of late also welcome.   0.7000 capping the NZD/USD rate for now though, and as with the AUD/USD rate, the base at 0.6815-20 does not fill us with confidence as yet.  

In Canada, we have to wait until Friday to get any top tier data, which will be Oct CPI.  BoC gov Poloz was focusing on this last week, in what looked to be another turnaround in policy sentiment, focusing on the inflationary impact of reaching full capacity and output.  The central bank have done well to contain the rate pricing euphoria which took the 10yr rate up to 2.20%, and USD/CAD down into the mid 1.200’s, but with long end rates back below 2.00% and the spot rate back under 1.2700, the gov can afford to be a little more neutral.  1.2500-1.2700 looks to be fair value in the meantime, so expect to see rallies above 1.2900 sold into (if we test back here again) as we have seen from late Oct.  

For Norway we have Q3 GDP next week, while in Sweden it is inflation time also, but NOK/SEK is starting to threaten the upside again, which is not unsurprising given where Brent Oil is trading at the moment.   EUR rates look more congested at the present time, but looking at the weekly spot charts, we can see further USD progress has been rejected for now.   

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