fx thoughts* Yesterday’s Riksbank action puts the focus on the inflation data from Europe at the end of the week. Market consensus is for a stabilization of EMU CPI following the recent weakness. However, if this fails to materialize, we would expect EUR to come back under pressure, bringing the recent period of consolidation for the currency to a halt. The debate regarding European policy has continued, with the market still focusing on the size of the ECB’s balance sheet and the potential for it to be expanded back towards the highs as suggested by Draghi. Concluding that the asset purchases announced so far will not achieve the extent of balance sheet expansion hinted at by Draghi, markets have kept speculation of a further extension of the asset purchase programme alive. * However, we believe that EUR is set to remain under pressure and extend the downtrend even without further measures from the ECB. The action already announced appears to be generating a more structural portfolio outflow from the Eurozone. While initially led by money market flows, these are now being joined by bond and equity market outflows. There is also evidence that longer-term business investment flows are turning negative. Net M&A activity, which we use as a proxy for FDI flows, turned EUR-negative in September. All these outflows from the Eurozone are now starting to offset the current account surplus, resulting in a deterioration of the basic balance – hence a more structural decline in EUR is now developing, in our view. * The FOMC meeting later this evening should be the main excuse traders will be using not to trade and for once, we probably agree with them. This seems to have been a long month and the price action of late suggests a market that is keen to see November, with its fresh data and, hopefully, a more defined trend. Cable seems slightly more bid than of late however we still feel we are stuck in a very broad $1.5950/$1.6220 range with very little to go on in between. * The greenback is still the best of a bad bunch and any European woes could well have a knock on effect in GBP so it is understandable why enthusiasm for the currency has waned over the last few weeks, however, the underlying outlook is still good for the UK and this should make any fall against the USD more gradual than against other currencies. The cross is still 0.7860/0.7910 however the range is narrowing which normally suggests that a breakout is imminent. Currency Pair London Open Overnight Range EUR/USD 1.2737 1.2728-1.2748 USD/JPY 108.05 107.99-108.24 GBP/USD 1.6134 1.6128-1.6154 EUR/JPY 137.65 137.60-137.81 EUR/GBP 0.7894 0.7889-0.7900 AUD/USD 0.8877 0.8849-0.8878 NZD/USD 0.7940 0.7911-0.7944 fx thoughts* Japanese retail sales rebounded by 2.3% y/y, well above market expectations, and compares to the previous month’s reading of 1.2% y/y, suggesting that sales are recovering following the tax hike earlier in the year, which resulted in a far greater negative impact than policy-makers had been anticipating at the time. With sales appearing to be back on track and the latest comments from BoJ officials not suggesting any policy changes at this point, we expect USD/JPY to gain support and would look to buy with a target at 110.00. * Bloomberg reports that the BoJ could moderate its language on inflation this week. The debate regarding the timing at which the 2.0% y/y inflation target could be reached also suggests that there is little pressure to introduce additional easing measures at this stage. The market consensus is now for unchanged policy at the 31 October BoJ meeting, an outcome we believe will provide additional JPY support. We expect the JPY crosses to come under pressure. * In Europe, the data from core countries continued to disappoint. The German Ifo was much weaker-than-expected, with both the current conditions and the expectations components showing a decline, also falling short of market consensus estimates. The expectations component is now at the lowest level since 2012 and has been declining since January. It is also interesting that European equity markets were back under pressure yesterday. * The move lower was led by the banking sector, which was down over 2.0% on the day, despite the AQR and ECB stress tests being seen as credible. As a result, we expect EUR to remain under pressure, not just against a stronger USD but also on the crosses. EUR/JPY is now set to come under further pressure, we believe. The EUR/JPY rebound has been limited by the 50- and 100-dma converging at 137.55/65, from where we expect a renewed move lower. A move below 136.20 triggers a renewed bearish signal. * In the UK, rate hike expectations have been pushed back until AFTER the general election into the latter part of 2015. This lowering of interest rate expectations is in line with the recent softening of UK activity data. Housing market data are also showing signs of slowing from the fast pace seen earlier in the year, and we expect this to be confirmed by a further moderation in the mortgage approvals data for September, due for release tomorrow. * Indeed, the geographical breakdown of housing market indicators suggests that the London housing market is currently leading the softening of the data. The FT reports that estate agents in London are reporting weaker conditions with political uncertainties, the prospect of a mansion tax (sell NOW) if Labour wins the general election next year being cited. Moreover, new MPC member Shafik has revealed for the first time her current thinking. * Comments from Shafik suggest that she is in no hurry to vote for a rate hike. The lack of wage growth or any pick-up of unit labour costs is keeping Shafik in the dovish camp for the time being. Shafik suggests that there is still further room for the unemployment rate to fall before spare capacity is used up and downplayed some of the signals being generated by surveys and other leading indicators of wage growth. * Deputy Governor Cunliffe is due to speak at 18.30CET today (at the Cambridge Economics Curriculum Reform Event). As a result, we expect GBP/USD rebounds to remain ‘limited’, providing selling opportunities. A move below the $1.6050 level would provide a renewed bearish signal, opening the way for a decline through the $1.5875 mid-October low. Currency Pair London Open Overnight Range EUR/USD 1.2714 1.2696-1.2719 USD/JPY 107.85 107.65-107.99 GBP/USD 1.6121 1.6112-1.6137 EUR/JPY 137.14 136.83-137.21 EUR/GBP 0.7886 0.7874-0.7888 AUD/USD 0.8829 0.8795-0.8839 NZD/USD 0.7902 0.7884-0.7914 fx 28/10/2014USD: Durables (13:30CET), ex-transport market central tendency ~0.0%/1.1%, consensus 0.5%. Downside miss potentially bigger mover but proximity to FOMC may dampen release. For tomorrow’s FOMC, we believe the range of likely outcomes is narrow with the primary battleground the degree to which downside risks to inflation and growth are emphasized. This means that the meeting is unlikely to disrupt the rebound in risk appetite, which argues for less USD buying as a pure carry trade. * EUR: EUR continues to trade firm following sourced MNI article on slow progress towards outright QE, although pace of Covered Bond buying raises questions on market capacity. No data of note today, so focus may shift to CPI later this week. While EUR could be subject to positioning squeezes into the FOMC and EZ CPI later this week, investors likely to maintain bearish stance, selling on rallies. * GBP: Nemat Shafik, Deputy Managing Director of the IMF overnight on the more dovish side albeit fairly consistent with MPC communications of late. Mortgage approvals 10:30CET will be watched for the degree of slowdown (62k e, 64.2 p), though only secondary driver. GBP crosses likely to take cues from other currencies. * JPY: Retail trade beat expectations, but did little to support JPY. Tonight’s IP will be more important, as among last figures falling into Q3 GDP the steep drop has been taken as indication of fallout from tax hike. Market looks for rebound (2.2% e,), but failure to bounce would boost expectations for change in stance from BoJ and support JPY-weakening. Pressure point on downside near 1.2%. * NOK and SEK: SEK a sell on rallies into the Riksbank (09:30CET), with 20 bps expected by analysts (60% ‘priced in’). Language on SEK and bar for unconventional measures the focus. Retail sales on the backseat, very likely to be overlooked (-0.5% m/m e, 1.9% p). NOK volatile on oil side, investors likely to stay short EUR/NOK below low 8.40s. * AUD: Few events of note, so investors will focus on degree of pullback on AUD/NZD. An extension of yesterday’s move on positive surprises in NZ would risk flushing weak longs. * CHF: Gold referendum now just under a month out drawing focus, could diminish risk-return characteristic of EURCHF longs despite proximity to floor. fx thoughts* As usual so far in October, the USD is trading slightly lower against almost all of the major currencies, but yesterday’s quiet start masks what should be another busy week in the FX market. The prospect of a later rate hike by the Federal Reserve is keeping pressure on the dollar. Concerns about global growth and the threat of Ebola continue to be at the forefront of everyone’s minds and as long as that doesn’t change, it will be difficult for the greenback to rally. However, selling dollars is NOT the only trade. * Despite all of the fears that slower global growth will spill over to the US, the Fed is ‘on track’ to end QE next week. However, just because the Fed will end QE doesn’t mean that they are ready to raise interest rates. n fact, the biggest story last week was that policymakers joined investors in scaling back their view on when rates will rise and this shift in bias should make its way into the October FOMC statement. * Given current market conditions, we expect the Fed to downplay the end of QE and the removal of stimulus. Therefore, we like remaining short USD/JPY or selling with a stop above 108 on the premise that investors will position for a less hawkish FOMC statement as the week progresses. The GPIF’s decision to increase the share of stocks in its portfolio should also attract foreign investment, creating demand for the JPY. * Considering that concerns about growth is driving currencies and equities, China’s 3Q GDP report could set the tone for trading this week. On Friday, the Chinese government injected $32bn into their banks, which could be their attempt to provide additional support ahead of weaker data. The changing competitive landscape and the government’s focus on domestic policy has and should continue to slow Chinese growth. * If Tuesday’s GDP numbers surprise to the downside with annualized GDP growth hitting 7.2% or less, the commodity currencies will be hit hard with the Australian dollar leading the losses. Chinese Q3 GDP rose slightly to +7.3% y/y, the slowest pace since 2009, but the outcome was better than market forecasts for 7.2%. Sep Retail Sales came in at +11.6% y/y, just below the market forecast for a +11.7% y/y rise. IP rose 8.5%/yr, above the 7.5% y/y. On balance the data were better than expected. * Overnight, Chinese GDP data came in above analyst expectations (7.3% vs. 7.2%) which saw gains for both the Aussie and Kiwi with AUD/USD hitting a high of 0.8829 and currently trades just above the 0.8800 handle. The JPY strengthened for the first time in 4 days and rose against ALL 16 major counterparts as the Nikkei 225 fell 2.0%, with USD/JPY hitting a low of 106.26. * The EUR is in play this week with the ECB’s covered bond buying programme having begun, the PMI reports scheduled for release on Thursday and the stress tests results due on 26 October. The ECB’s participation in the market is aimed at driving yields lower but instead we are seeing a significant increase in Italian, Spanish and Portuguese rates, reflecting investor skepticism and disappointment. Meanwhile, given the recent deterioration in Eurozone data, we expect the PMI reports to show a further slowdown in economic activity. This coupled with concerns about the bank stress tests is why we find selling EUR/USD up to $1.3000 an attractive trade. * The USD downward correction is not yet complete with US bond yields staying offered despite the S&P500 regaining ground and crossing the 1900 level, just shy of the 200-dma. Volatility has eased, increasing the attractiveness of yield and therefore explaining the recent outperformance of AUD and NZD. The big test for markets will come tomorrow when the US September CPI is due for release. * Last week saw risk selling off sharply when US retail sales and the PPI both disappointed. The chance of seeing the CPI coming in below expectations is high due to USD strength depressing import prices, and the steep fall of energy prices witnessed over recent months. In Europe, declining inflation expectations have converted from a market supportive factor, working via the prospect of further ECB easing, towards an outright negative factor as investor’s price declining corporate pricing power. In the US, the starting point is different since US inflation, currently at 1.6% y/y, is substantially higher compared to EMU’s low 0.3% y/y. Hence, a weak US CPI reading will make investors consider again the ‘lower for longer’ Fed interest rate scenario, providing risk with some support. 21/10/2014* After a bumpy start to the trading session yesterday, it was back to service as (‘new’) normal yesterday. Although equities ended lower in Europe (Euro Stoxx -1.2%), there was a surge in the Nikkei (+3.8% on news the government pension fund will be raising its equity allocation: Japanese savers who have seen a 7.2% YTD drop in their portfolios even after that rally will no doubt be delighted), and the US also ended in the green (S&P +0.9%) on earnings data. Nonetheless, as part of that (new) normal trend, 10-year US Treasuries still aren’t buying the equity rally, with yields closing unchanged at 2.19%. * In Europe the ECB started its covered bond buying programme, with reports of purchases of up to €25m from a number of different countries. However, Euro periphery government yields had another bad day with Greek 10s closing unchanged at 8.08%, but Spain +9 bps at 2.26%, Portugal +18 bps at 3.48%, and Italy +10 bps at 2.60%. In FX EUR/USD broke back above $1.28 once again, while JPY is hovering around the 107 level. * The RBA minutes from the October meeting released today reiterated that ultra-low rates (by local standards) have succeeded in juicing the housing market - and very little else. However, there appears only minor signs of the Bank being willing to act on housing via macro-prudential policy to then allow rates to decline for the rest of the struggling economy: only the mention about the need to maintain lending standards on housing loans leans in that direction at all. * The DXY has pierced 85.00 support and threatens to test the Thursday/Friday lows at 84.75. ECB member Nagel noted that low rates for too long risks fuelling asset bubbles, which helped trigger the move higher. Look for offers ahead of the Thursday/Friday high at $1.2845/50, which has held on 5 attempts in the last 3 trading days. GBP/USD has followed EUR/USD higher to 1.6175, with some talk of higher expectations for UK GDP on Friday. * Outside of FX markets have been generally uninspired in New York with little data announced and a lack of meaningful headlines. European equities ended the session lower but the picture has been a little less clear here at home. The biggest news of the day was IBM’s pre-open earnings announcement that disappointed most analysts and caused the stock to open the day 8.5% lower than Friday’s closing price. * Elsewhere, Apple gained ahead of their earnings announcement to lead consumer stocks higher. Chatter about Apple’s new Apple – Pay service created a buzz around the stock. The details of the service were explained and special attention was paid to the security features which seem to be robust. Bonds had a fairly quiet day with the US 10-year losing 1 bps to 2.179%. Gold is traded $6,00 higher at $1,245 which is the first time in 3 days that the yellow metal is in the green but it remains well within recent ranges. WTI is trading slightly lower on the day but remains above support at $82.00/bbl EUR/USD – taking out $1.2800 and some short term trend resistance. USD/JPY and the Nikkei – the trend is still intact despite the recent volatility…… USD* In the next few hours, I will be giving a few thoughts/ideas (post-US retail sales) on the MAJOR currencies both now and for the next 12 months. I do not need to tell anybody that we have seen a dramatic shift in FX trading since the beginning of Q4. If there are any other currencies, please inform us as we would take the time to e-evaluate our thoughts/ideas. * The USD surged in Q3, rallying 7.75% and 8.21% against EUR and JPY. EUR dropped over 10 big figures throughout Q3 while currency market volatility sprung back to life. The DXY index rallied 7.7% in the same time period – 1.73 standard deviation quarterly move relative to the 30-year average. * We highlight 2 key factors for the outsized USD move in Q3: 1) economic divergence and 2) the rise in US rates. While we remain bullish on the USD in the medium-term (we adjusted our forecasts accordingly), we also think that the USD has moved too far, too fast, increasing the scope for a ‘possible’ short squeeze. * Indeed, changes in the 2-year rate can explain ‘about’ 20% of the G-10 price action over Q3. Bar NZD, JPY and GBP (which had other idiosyncratic drivers) the change in the 2-year rate correlates well with the price action. Growth momentum and weaker Fed “forward guidance” helped drive the front-end of the US curve, allowing US rates to recouple with macro fundamentals. That said, the market has fully priced in the US growth story and the expected lift-off in the Fed fund rates next year. In fact, the USD has overshot levels consistent with the rate outlook. In turn, we see scope for a mild pullback in the DXY and NEER. * The second big driver of the USD rally is the divergence in global growth. We also think this story has runs its course for now and better growth news is needed for the next leg of the USD rally. The spread between the US and G-10 surprise indices peaked in early September, which is also around the time when the DXY rally stalled. In our view this relationship demonstrates that further USD gains need better ‘economic news’ relative to the rest of the world. We suspect the bar is quite high for US growth news and in turn we think corrective forces will weigh on USD over the next few weeks. fx thoughts* USD: Potential for some consolidation near term, with investors looking to tomorrow’s retail sales. The data tomorrow alongside IP later this week will be viewed in the context of investor fears of lower future inflation and global growth. * EUR: Weidmann comments yesterday underscored the divisions at the governing council on QE. German ZEW at 10:00CETexpected drop to 15 in current situation (range 5/26). EZ IP at 11:00CET, expected drop to -1.6% m/m (we are, -1.8%, range -2.5/-0.5). Second day of EuroGroup meeting could produce more headlines today with some scope for disappointment for those looking for fiscal stimulus signals. ECJ will hold its haring on OMT focusing on issues like OMT’s unlimited size raised by the GCC. No decision is expected today but the discussion could offer some early hints about the direction of the debate and the ultimate decision. Data weakness may not trigger sustained EUR weakness given the uncertainty about ECB QE. * GBP: Carney comments yesterday largely reiterating sentiment from previous minutes. UK CPI at 10:30CET, expected drop to 1.4% y/y (range 1.3/1.5%). Stronger print could be the bigger surprise. Labour market data tomorrow likely more important. Evidence that domestic demand in the UK remains resilient could help GBP consolidate. * JPY: Fairly quiet week in Japan means JPY could be a function of market positioning and risk more broadly. USDJPY may continue to languish on profit taking, though better US data could limit the downside later in the week. * AUD: RBA Debelle talking down AUD overnight, drawing attention to risks of volatility. AUD weakness may have further to run amidst moderation of growth expectations. * NOK and SEK: Swedish CPI inflation at 09:30CET, core CPIF expected to accelerate to 0.6% (range 0.6/0.8). Softer print could be the bigger surprise on the day. That said, markets heading into the release with some easing bias. EUR/NOK and EUR/SEK will remain a function of central bank expectations and market risk sentiment. * CHF: CHF above all a risk proxy near term with the DM inflation outlook the more medium term driver. CHF could trade on the stronger side to the extent risk remains under pressure. Currency Pair London Open Overnight Range EUR/USD 1.2704 1.2665-1.2768 USD/JPY 107.12 106.76-107.47 GBP/USD 1.6055 1.6052-1.6113 EUR/JPY 136.09 135.89-136.55 EUR/GBP 0.7912 0.7885-0.7934 AUD/USD 0.8777 0.8736-0.8777 NZD/USD 0.7888 0.7857-0.7917 14/10/2014* Major crosses such as EUR/USD and USD/JPY moved sideways overnight, but EUR/USD has opened in London at $1.2700, down 48 pips, with little in the way of new fundamental news released. GBP/USD weakened from the London open after comments from BoE Governor Carney’s interview on CNBC-TV triggered a reassessment by the market of the commencement of rate increases in the UK. “As some economies emerge from a period of exceptional unconventional stimulus, there will be greater volatility”. “That in and of itself should not influence the path of normalization of monetary policy… The real factors we’re discussing – external demand pressures, a benign global inflationary environment, developments in our own labour markets – those will certainly influence the path of policy… We have to take into account a more modest global recovery, particularly if that’s the case in Europe.” * There were limited moves on core euro area sovereign bond markets, although UK gilts outperformed with yields falling around 5 bps across the curve on the back of Carney’s comments. Gold and crude oil price moves were also muted. Chinese trade data for September showed a trade surplus of $31bn. Exports (+15.3% y/y) and imports (+7% y/y) were both stronger than expected. While the lift in the trade surplus in Q3 will likely provide some positive impetus, the decelerating momentum in domestic demand points to downside risk to Q3 GDP growth. * Markets remain in a risk off mode with the VIX volatility index climbing to its highest level in more than 2 years following renewed falls (Dow -1.35%; S&P500 -1.65%; NASDAQ -1.46%) in US stock markets last night. US bond yields remain heavy this morning and oil prices also remain soft. Economic data due today is unlikely to provide much reassurance, with Eurozone data, in particular, is expected to be soft. The German ZEW sentiment is expected to show further declines in light of recent softness in German economic activity data, while IP for the whole of the Eurozone is expected to have contracted by -1.5%. * The focus today will likely be on German ZEW index, although there are several other smaller releases to keep an eye on as well. For the ZEW, we think that we’re in for another month of softness, and look for the current assessment to fall from 25.4 to 10 and expectations from 6.9 to just below 0.0, with both coming in below consensus expectations. We also have Eurozone IP today, where after the softness from Germany but a little more stability from France, and Italy, we are in line with consensus in looking for a decline of -1.6% m/m. * Also today are final Sept CPI readings for France, Spain, and Italy, as well as the beginning of the European Court of Justice hearings on the ECB’s OMT programme, although the ECJ ruling isn’t expected until the middle of next year. Thanks to another 4.0% drop in oil prices during the month, we look for UK CPI to slip from 1.5% in Aug to a fresh 5-year low of 1.3% y/y in Sept, but with lower energy prices tempered by the depreciation in GBP. Assuming that oil prices stabilize from here, this should be the low point for UK CPI. * Markets are looking for Swedish CPIF to rise from 0.5% to 0.6% y/y in Sept. While the Riksbank was looking for a 0.7% reading when it published its forecasts in early September, that was before the further decline in oil prices during the month, so the only real question is how big of a downside surprise we’ll see. If CPIF comes in below the consensus reading, then that may help to support recent chatter that the Riksbank is likely cut rates by another 10-20 bps now that further macro-prudential measures have been proposed. fx* USD: USD slightly softer on the open following Fed comments over the weekend, though context of comments not as dovish as headlines. Markets may remain relatively contained over the next 24 hours with the public holiday in the US. Retail sales and IP figures throughout the week could provide near term catalysts for further USD strength. * EUR: ECB President Draghi reiterated over the weekend ECB’s desire to actively grow the size of its balance sheet. The lack of details, however, could continue to discourage active sellers. Eurogroup meeting and press conference later today could offer some insights into officials’ plans to revive the economy ahead of the October EU summit. Disappointing ZEW tomorrow (expected drop to 15, range 5.7/26) and Eurozone industrial production later in the week risks for EUR. * GBP: A busy week in the UK with CPI tomorrow and labour market figures Wednesday. CPI expected to drop to 1.4% y/y (range 1.3/1.5%). Stronger print would be the bigger surprise. Investors pared back BoE hike expectations fearing fallout from the deepening EZ slowdown. Stronger figures this week may change that perception and help GBP consolidate across the board. * JPY: Fairly quiet week in Japan means JPY could be a function of market positioning and risk more broadly. USDJPY may continue to languish on profit taking, though better US data could limit the downside later in the week. * AUD: Chinese trade data provided an early boost for AUD but it may prove only short-lived given persistent risk off. No major events outside RBA Debelle speeches today and Wednesday. We think AUD weakness has further to run amidst moderation of global growth expectations. . * NOK and SEK: Swedish inflation figures the only data of note for Scandies this week. Ahead of the release tomorrow market is looking for core CPIF to accelerate to 0.6% (range 0.6/0.8). Softer print could be the bigger surprise especially given Riksbank’s view that the lows in inflation are behind us. The direction of the release could be the final ruling on chances of a final Riksbank cut. EUR/NOK and EUR/SEK will remain a function of central bank expectations and market risk sentiment. The latter may keep the crosses supported for now. * CHF: CHF above all a risk proxy near term with the DM inflation outlook the more medium term driver. CHF could trade on the stronger side to the extent risk remains under pressure. Currency Pair London Open Overnight Range EUR/USD 1.2654 1.2620-1.2698 USD/JPY 107.41 107.06-107.62 GBP/USD 1.6086 1.6062-1.6127 EUR/JPY 135.93 135.55-136.13 EUR/GBP 0.7866 0.7852-0.7877 AUD/USD 0.8716 0.8652-0.8750 NZD/USD 0.7850 0.7795-0.7888 fx thoughts* USD has recovered most of the losses seen following the FOMC minutes. But the policy focus on currencies remains in place. Indeed, the referencing of currencies in policy statements had previously been confined to policy-makers of countries with high-beta currencies, where overvaluation had been issue. However, currencies now appear to be taking a much broader role in the policy discussion, even when valuation extremes do not appear to be the issue. The ECB’s policy approach of expanding its balance sheet assumes that EUR will act as a transmission channel, in our view. EUR is not overvalued on aggregate, although the case can be made that it is still too high for many of the peripheral countries. Our analysis of the fair value of EUR for the individual countries continues to show that EUR is overvalued for more than 50% of the EMU countries, most notably Greece and Italy, where we estimate fair value of EUR/USD at $1.04 and $1.17, respectively. * However, while the Fed has referenced USD in the FOMC minutes, it is much harder to make the case that USD is overvalued at this stage, even after the recent sharp gains. This leads us to believe that it is the pace of recent gains which prompted the FOMC reference to USD, rather than the level. What is clear to us is that currencies appear to be increasingly moving to the forefront of the policy debate. * Indeed, ECB officials have once again hinted at the possibility of QE in speeches yesterday. Both Draghi and Nowotny suggested that the current measures could be expanded to achieve further stimulus and expand the balance sheet even further. This is likely to have a direct negative impact on EUR. EUR/USD has reversed to the downside once again after the recent corrective rebound fell just short of the $1.2800 level. A move back below the $1.2650 level would give a fresh bearish signal, returning the focus to the $1.2500 lows of last week. We maintain our longer-term bearish EUR/USD view.