In our third installment of the Investment Bank Outlook 08-12-19, we’re going to 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 Outperforms High Yielders, Underperforms Low Yielders Bullish
Watch: PPI, CPI, Retail Sales, IP, UMich Survey
The combination of continued softening in global data, trade tensions, and an insufficiently dovish Fed may keep USD supported against trade- and risk-sensitive currencies, particularly AxJ EM. However, USD is likely to soften against countercyclical currencies like EUR, JPY, and CHF. Fed rhetoric this week suggested that while the FOMC is attentive to trade risks, they preferred to maintain optionality and watch the data for now. Meanwhile the announcement that the US would be labeling China a currency manipulator was a strong signal that trade tensions would continue to escalate and that a near-term resolution was unlikely.
EUR Carry Trade Unwinds Support EUR Bullish
Watch: German ZEW Survey, GDP, Employment
EURUSD has rebounded since trade tensions began re-escalating on August 1st as EUR-funded carry trades have unwound. We think this process can continue further given the EUR’s popularity as a funding currency, in turn a function of the low borrowing costs, soft growth, and the prospect for ECB dovishness. Given the risk that trade tensions continue to escalate and risk off trading continues amid insufficient Fed dovishness, we see risks that these carry trades continue to unwind, leading to a further EURUSD rally. EURUSD is in the middle of its recent range and may face resistance at 1.14.
JPY Risk and Rates Weigh on USDJPY Bullish
Watch: M2, GDP, Machine Tool Orders, IP
Continued rhetoric from the Fed suggesting that policy will remain reactive, not proactive, coupled with slowing global growth and continued trade escalation, suggest USDJPY will continue to trade lower. While US data have continued to indicate gradual deceleration in output, news that the US would label China a currency manipulator concretized expectations that a near-term resolution to trade tensions is unlikely. JPY may perform particularly well against risk and trade sensitive currencies such as CNH. USDJPY faces support at 105.50.
GBP Driven by Brexit Bearish
Watch: GDP, IP, Unemployment, CPI, Retail Sales
We remain bearish on GBP as ongoing political uncertainty related to Brexit keeps risk premium in the currency. Market perceptions that a no-deal Brexit probability remains plausible will keep the currency under pressure, while USD may stay supported amid an insufficiently dovish Fed. We are watching the 1.2080 support level closely. While GBP sentiment and positioning are already very bearish, for GBP to rally sustainably, it will require a concession from the EU on the Irish backstop, which is likely to take time. Relatedly, we are attentive to risks around a general election which would add further uncertainty to the process. We like to express GBP bearishness via EUR and CHF.
CHF Selling USDCHF Bullish
Watch: Sight Deposits
We continue to expect CHF outperformance, particularly against the USD. Low-yielding, countercyclical currencies like CHF should continue to gain amid ongoing trade uncertainty and slowing global growth. A broad EUR rally on the back of an unwind in EUR-funded carry trades may not only weaken USDCHF; it also reduces the need for SNB FX interventions. In any case, SNB interventions would only slow but not reverse the CHF appreciation trend. Brexit uncertainty is also a CHF-supportive factor. EURCHF has further downside to 1.08, in our view.
CAD Watching for BoC Rhetoric Closely Bearish
Watch: Housing Starts, Unemployment
The combination of ongoing trade uncertainty, slowing global and US growth, and falling crude prices should keep USDCAD supported. We are closely watching for BoC rhetoric to see how their view on the rate path changes. The BoC has previously highlighted trade as the chief risk to the outlook, and the uptick in protectionism may lead to dovish rhetoric ahead of the September 4 meeting. Meanwhile Canadian data may soften from here given the heavy linkages between US and Canadian manufacturing, the former of which has slowed along with global trends..
AUD RBA Pressured to Cut Neutral
Watch: RBA SMP, Business Confidence, Consumer Confidence, Wages, Unemployment
We turn tactically neutral on AUD for now and think AUD could outperform NZD. The RBNZ this week aggressively cut 50bps while the RBA may take a more cautious stance for now, having already eased policy. Sentiment is also less bullish on AUD compared to NZD, suggesting more room for the latter to fall than the former. Over the medium term one key bright spot for AUD is that it tends to outperform during Fed cutting cycles, once the Fed becomes sufficiently dovish the AUD may catch a bid. AUDUSD faces support at 0.6750.
NZD Proactive RBNZ Weighs on NZD Bearish
Watch: REINZ House Sales, PMI
The combination of continued trade tensions, a proactively dovish RBNZ, and an insufficiently dovish Fed suggest NZDUSD will continue trading lower and that NZD will underperform AUD and EUR. NZDUSD is particularly sensitive to rates suggesting the RBNZ’s dovishness will weigh on the currency more acutely. Given that the NZ Treasury is currently examining the potential implementation of unconventional monetary policy as well, we view it likely that the market will continue to price in dovish expectations keeping NZD rates low.
Our estimate for July CPI inflation (Wednesday) at 1.6% is two tenths higher than consensus and three higher than the Riksbank. If correct, it should benefit the SEK (lower EUR/SEK). That said, almost everything else has moved in the wrong direction for the Riksbank. Hence, we would not make too much of that especially since inflation is heading lower in the next few months. For EUR/SEK, it could provide a buying opportunity. In the meantime, risk sentiment will be key for EUR/SEK, where the negative correlation seems to be back in play.
In EUR/DKK, Novo Nordisk will pay interim dividends to shareholders next week – ex date is on Friday. During every Novo Nordisk dividend payments since 2015, EUR/DKK has risen between the ex date and the date payable, most times around 20pips, as the dividend payments are large and the company has a large foreign ownership share. Hence, there is potential for a brief comeback in EUR/DKK after the dropback last week.
The drop in Q2 UK GDP on Friday triggered a sharp rally in EUR/GBP up to 0.93. A setback in growth was expected after the inventory build-up in Q1, but not a contraction. The GBP was already facing headwinds from Brexit anxiety and negative global risk sentiment. As a consequence, the market has started to raise the odds further of a Bank of England rate cut in November.