FX Market Update - The USD Retains A Firm Undertone As Global Stocks

1
FX Market Update - The USD retains a firm undertone as global stocks

post a significant rebound on the day, following yesterday’s lead from US
markets (N225 +2.2%, Stoxx 50 + 1.4%). Developed market bonds are
mixed to slightly weaker while energy prices are firm and metals prices a
little softer in early trading. Monthend USD demand is helping lift the USD
generally over the past few days, suggesting that recent USD gains may
stall or reverse later in the week but investor optimism likely remains
fragile, given persistent worries over US/China trade talks, Brexit and the
looming mid-terms. Weaker than expected Chinese PMI data overnight
and comments from the Chinese Politburo, noting that “downward
economic pressure” was rising suggest the Chinese economy is suffering
a little more acutely from US tariff action – which might worry investors but
might also persuade President Trump that he is on the right course. The
CNY is modestly weaker, leaving the USD creeping towards the
psychological 7.00 level. Elsewhere, the GBP is out-performing somewhat
– but will still return a poor month overall for Oct – while the AUD is under-
performing on weaker than expected Q3 CPI (+0.4% Q/Q versus +0.5%
expected). The MXN retains a soft undertone following the Mexico City
airport decision. The US data calendar picks up a little today, with Oct
ADP jobs data at 8.15ET, Employment Cost data at 8.30ET and the
Chicago PMI data at 9.45ET. BoC Gov. Poloz and Senior DG Wilkins
return for more parliamentary testimony at 16.15ET.
2
USDCAD (1.3135) • The CAD is soft, down a modest 0.2% vs. the USD
while underperforming all of the G10 currencies along with AUD, NZD and
gold. Drivers appear to be shifting as crude correlations weaken and
spread correlations firm, suggesting a pivot in the market’s focus from
broader developments toward the outlook for relative central bank policy.
Domestic risk returns with the 8:30am ET release of monthly GDP for
August and will remain elevated into the end of the week as market
participants look to a heavy BoC schedule with Poloz and Wilkins’ second
parliamentary appearance at 4:15pm ET and Lane and Schembri’s public
appearances on Thursday. Canada also releases its latest trade and
employment data on Friday. Yield spreads have widened modestly over
the past week, fading a portion of their BoC-driven compression.
Measures of implied volatility are also rising broadly and short-term risk
reversals appear to be recovering from relatively low levels. The cost of
protection against short term CAD weakness is low and bearish
speculative positioning is light.
GBP weakness overdone ahead of BoE?

UK confidence has fallen again, with the Lloyds Business Barometer
dropping to 19 from 29, and GfK consumer confidence slipping to -10 from
-9, likely due to Brexit uncertainty. Official Chinese PMI data also
weakened more than expected, especially manufacturing, suggesting that
trade tariffs are starting to take their toll. Tomorrow morning we will get the
independent readings from Caixin. Australian inflation slipped to 1.9%
from 2.1%, as expected. The Bank of Japan left its policy unchanged, but
reiterated that economic risks remain to the downside and revised its
expectations of inflation lower. FX and the USD in particular remain
dominated by month-end flow.
It’s a busy day ahead. In the Eurozone, annual ‘headline’ CPI inflation is
expected to be unchanged at 2.1% in October, but ‘core’ inflation is
currently running well below the ‘headline’ rate, which suggests that
underlying inflationary pressures remain relatively muted. We expect a
modest rise in the ‘core’ rate to 1.0% from 0.9%. If so it is unlikely to
impact the EUR.
In the US, the employment cost index for Q3 will provide an update on the
pace of growth of in labour costs. The ECI is a more comprehensive but
less timely measure of wages than the monthly series, which is released
with the labour market report on Friday. As that indicator is now
suggesting that wage growth is accelerating it will be interesting to see if
the ECI confirms that trend. We forecast a quarterly rise of 0.8% up from
0.6% in Q2.
3
GBPUSD
Prices remain under pressure from month-end USD flow, approaching the
previous 1.2660 August reaction lows. A number of indicators are
suggesting prices are getting stretched down at these levels, and ahead of
the BoE tomorrow. As such, we a biased for the downside to be limited
before a rebound back towards 1.2850, with a break through there
suggesting the range lows have held. 1.2950-1.3050 is the next notable
resistance above. Below 1.2660 support lies at around 1.2595 and then
the 1.2500 region.
Long term, we believe the bear cycle, which started back in 2007 at
2.1160, completed at 1.1490. On a multi-year basis, this suggests mean
reversion back to 1.50-1.60.

FX Market Update - The USD Retains A Firm Undertone As Global Stocks

Uploaded by

Copyright:

Available Formats

FX Market Update - The USD Retains A Firm Undertone As Global Stocks

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

FX Market Update - The USD Retains A Firm Undertone As Global Stocks

Uploaded by

Copyright:

Available Formats

1

FX Market Update - The USD retains a firm undertone as global stocks

GBP weakness overdone ahead of BoE?

You might also like