In our Investment Bank Outlook each week, we bring you a selection of perspectives from leading investment banks to outline the key issues and directional views for the week ahead. These excerpts, taken from research notes, will cover issues such as key market themes, economic releases, as well as any major trends and levels to watch. Please note, this material, which does not reflect the opinions of Tickmill, is provided for educational purposes only and should not be taken as an investment recommendation.
USD Remaining Bearish – Bearish
Watch: ISM, ADP, Trade Balance, NFP, UMich Survey
We suggest fading temporary USD strength driven by upside surprises in US data. The Fed has signaled a high bar to raising rates, suggesting that front-end rates differentials should have limited movement. A declining negative correlation between USD and risk demand makes JPY a better expression for positioning for this tactical risk consolidation. An eventual US-China trade deal should provide a measure of policy certainty that would bolster investor confidence in global growth, weakening USD broadly. We are watching DXY trend channel support around 97.70 closely, and a break below would open potential to the 2H19 low at 96.00.
EUR More Signs of Bottoming Growth – Neutral
Watch: M3, CPI, PMI, Unemployment, GDP
EUR may trade broadly stable against USD in a tight range while weakening on the crosses, particularly against high-yielding currencies. The EMU November flash PMIs support our view that EMU growth may be bottoming, but the rebound may only set in more materially in 1Q20, suggesting that EUR may continue to be used as a funding currency for carry trades for now. However, FX-unhedged inflows into eurozone equity ETFs – which supported the EUR rally in 2017 – have also started picking up, suggesting limited downside potential for EURUSD. 1.10 is the psychological support level to watch in EURUSD, while 1.11 is the first line of resistance.
JPY Turning Neutral – Neutral
Watch: Tokyo CPI, IP, Capital Spending, Labor Cash Earnings
We turn neutral on JPY. We expect a phase one deal to be signed in the near term, which should support investor confidence and flows out of Japan. Risks to USDJPY remain skewed to the downside though as concerns mount regarding US asset valuations and high corporate leverage. Despite improved risk demand, our economist expects a supplementary budget to be unveiled, the size of which will surprise market expectations to the upside. Unexpected fiscal stimulus could boost Japanese rates, offsetting better risk demand’s effect on USDJPY.
GBP Tracking Election Polls – Bullish
Watch: Mortgage Approvals, PMI, Election Polls
We view the recent GBP weakness as a buying opportunity as the opinion polls continue to point to a comfortable lead for the Conservative Party. We expect an orderly Brexit resolution early next year, which would reduce uncertainty and unleash investment, suggesting that GBP looks undervalued from a medium-term perspective. Once the path to an orderly Brexit resolution becomes clear, we expect front-loaded GBP purchases as foreigners lift hedges and invest in cheap GBP assets. GBP should rally sharply, more prominently against USD as positioning is lighter than in EURGBP. EURGBP closing below the key 0.8540 level could provide more GBP-bullish momentum.
CHF EURCHF Staying in a Tight Range – Neutral
Watch: GDP, KOF Leading Indicator, CPI
We see EURCHF staying within the 1.0810-1.11 range for now as uncertainty over the US-China phase one trade deal and UK elections is unlikely to be eradicated in the near term. However, the downside for EURCHF should also be limited as the SNB is likely to step up FX interventions near the 1.08 level. Given that we expect an orderly Brexit resolution and recovery in EMU/global growth early next year, German Bund yields should rise, EM FX should outperform and Brexit hedges in CHF should reduce – all of which argue for a higher EURCHF. Hence, we view any dips in EURCHF towards 1.08 as buying opportunities.
CAD Selling Rallies into the BoC – Bearish
Watch: GDP, BoC Rates Decision, Unemployment
USDCAD may remain within the range it traded this week, oscillating between support around 1.3270 and resistance around 1.3320. We expect the broader upward trend in the pair to resume. Market expectations for August GDP may have crept higher after trade data surprised to the upside – after most economists had already submitted estimates. As a result, the bar may be higher for an upside surprise. We suggest fading temporary CAD strength following the conclusion of the CN Rail strike, since continued long positioning should limit appreciation potential. Forward guidance from the BoC has been uneven, raising the risk of a dovish hold if BoC speakers repeat the possibility of future insurance cuts.
AUD RBA Removes Near-Term QE Risk – Neutral
Watch: Private Capex, Building Approvals, RBA Rates Decision, GDP, Retail Sales
In a speech, the RBA provided a clear explanation and set the parameters for the necessary conditions for Australia to engage in QE. The RBA outlined that QE would not be used: 1) Until the RBA has reached its zero lower bound (defined as the cash rate at 0.25%; and/or 2) Outside a material deterioration in data (leading to very large deviation away from the RBA’s inflation and employment mandate). With both criteria unfulfilled, the RBA notes that QE is quite unlikely in the near term. For us, this removes a tail risk for our bullish AUDUSD view. We see dips in AUDUSD towards 0.67 as a buying opportunity.
USD ISM Manufacturing PMI at 15:00 GMT for November will be the highlight as market participants fully return from Thanksgiving. Citi Economics is significantly below consensus expectations calling for 48.4 vs median 49.6. We expect an only modest change in line with mixed regional manufacturing indicators that revealed strength in some of the overall measures, but softer details. We also get Final Markit Manufacturing PMI at 14:45 GMT but it shouldn’t move markets so close to ISM.
CAD Markit Manufacturing PMI at 14:30 GMT. This data point has been rebounding over the past few months after falling below 50 in August. The main highlights this week for Canada will be the Bank of Canada meeting on Wednesday 15:00 GMT and jobs data on Friday 13:30 GMT.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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