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Trading  | January 14, 2018

FX Weekly Preview – submitted by Shant Movsesian and Rajan Dhall MSTA

After another week of USD losses, it seems there is little to stem the tide which is spreading through the market despite the fundamental backdrop favouring a correction (at the very least) as well as short term dynamics showing the downside as overstretched – perhaps a redundant metric in this day and age of algo insurgency.  Blaming Trump policy is a familiar soundbite, with trade tensions hanging in the air and perhaps prompting some of the suggestions that China will trim or half buying of Treasuries which will impact on the yield curve.  Indeed, the likes of Bill Gross are calling now calling a bear market in Bonds, though it is not clear whether he is incorporating the above conjecture into his reasoning.  

One notable event for next week to interject with at this point (mentioning China) is the start of trade in the PetroYuan contract, which USD traders will be looking at for potential traction – or not – as this will naturally shed fresh light on the fate of the greenback as the global reserve currency, though naturally, over time.  

Nevertheless, the currency markets are making their view clear, but we (amongst others) are not going to go with the consensus, though this looks set to be tested in a market salivating at the prospect of a new trend to cling on to.  Looking at the daily and weekly charts, we can see the pointers are towards yet more weakness in the greenback – DXY tripped just below 91.00 – but we have a similar scenario this time last year when all and sundry were calling for parity and below in the heavily weighted EUR/USD rate.  The reflation trade done and then some; this is now turning into a potential washout, with the above episode with China’s intentions on Treasury buying putting focus of the ever concerning debt mountain in the US. 


Friday’s much awaited CPI figures also turned out a tick up in the core inflation rate, but to little impact, as the market now has a preset idea of where it wants to take rates, and going against the data is par for the course these days – more periodically in the past.  On inflation per se, it was refreshing to hear the San Diego Fed’s Rosengren arguing for an inflation target range rather than obsessing over single number – it has confounded us as to how central banks and markets fixate themselves on what are now moderate deviations.  At 1.8%, we are moving in the right direction, and with the USD falling as it is. we will soon be worrying about an overshoot.  Perhaps it will take this view to finally find some temperance in USD selling, but the current narrative keeps the algos hungry for more downside.  

Calls for EUR/USD are now skewed to the upside, with projections of 1.2500-1.3000 commonplace, and from a growth perspective, it is hard to argue against the recovery in the Euro zone, but this seems to be at the neglect of many other factors set to dictate ECB policy.  Their solitary inflation mandate will naturally threaten the pick in asset price growth, and having breached 1.2200 on Friday, the spot rate may come under some jawboning in light of the perceived response to any signal to the end of the APP.  Buba/ECB’s Weidmann speaking late Friday may have tried to temper this will calls for a gradual normalisation process, but headlines drive markets these days so they will have to suffer the consequences of their own ‘success’ – if you can call it that.  

We also have the Italian elections coming up at the start of March, and it is only a matter of time before jitter set in, but complacency to risks is becoming a risk in itself at present so it would not surprise us to see this brushed under the carpet until near the date!  

Even so, were are in a resistance area which could see EUR gains losing momentum, and ahead of 1.2500, 1.2225-1.2300 is an area which could incorporate some consolidation – which could align with the false break in the DXY.  A sustainable break and close below the previous base just ahead of 91.00 will see tech-based traders arguing for a continuation backed up by the factors such as the US deficit and debt levels alluded to above – interesting that they were not an issue some 10-12 months ago!


Just as EUR/USD may get a stretch towards 1.2300, Cable has the added impetus of Brexit optimism behind it, though Friday’s surge through the previous top at 1.3660 got a firm helping hand from a well timed source piece that Spain and the Netherlands were looking to work together with a view to a soft Brexit.  This was later denied but conveniently ignored and the move extended towards 1.3700 and above, ending the North American session not too far off the highs.  We have long dismissed the idea that there is anything material behind the notion that the negotiations with the EU are looking more positive, but once again, sentiment is being dictated by a Pound resurgence, which is also being validated by its undervaluation.  

Last week’s moves have extended through the upper end of the 1.2500-1.3500 we had anticipated would hold for the interim, and the breakout may well underpin a tech based move towards 1.4000, with 1.3840-50 the only major (Fibonacci level 61.8) standing in its way.  Over the weekend, Nigel Farage – for all his worth (!) – has been given airtime to opine of a risk of a second Brexit referendum, but we put this down to the lack of any material news on the issue given talks do not start until next month at the earliest. USD momentum is carrying the Cable rate, so is closely tied to EUR/USD with EUR/GBP hemmed into a tight 0.8800-0.9000 range for now. 



Nothing really stands out in terms of data when looking at the above currency areas but for UK inflation numbers due for release on Tuesday, with a higher Pound expected to rein in the yearly rate back to 3.0% at least.  On Friday, we also get Dec retail sales and this is where the numbers could start to bite, though pre Xmas spending could again distort some of the weakness many expected ahead. 

EU wide inflation is out next week but is merely the final reading for Dec.  The Jan numbers will be of interest given the impact in the continued gains in the single unit, which sees eager to complete this year’s projections as quickly as possible!  

Industrial Production in the US will have little impact if any if the market ignores the top tier figures as it did on Friday, we gets a cursory mention, though worth keeping an eye in capacity utilisation which currently stands at 77.1% compared to say Canada which is currently at 85%.  Europe is at 83.8% spread across the regions, and 84.7% in the UK, but manufacturing is a much lower component of GDP in the latter. 

In Canada, all eyes are on Wednesday’s BoC meeting, where we can only expect the recent shake up in the NAFTA talks will have dampened some of the rate hike expectations.  The central bank has cited this as a risk to the economy in the near term, and as such, may tip the scales a little towards caution and delaying a move until later this year.   When looking at the CAD across the currency spectrum, we can see that the weakness against the USD is all USD based, losing ground over the past week against all its other major counterparts bar the safe-havens (JPY and CHF).  



AUD and NZD gains have developed for the same reasons, with continued risk appetite in in stocks also backing higher levels as are the prospect of further gains in commodity price.  For Australia in particular, job growth has also been supportive of late, and we have the Dec employment report due for release on Thursday which may well propel the pair to test 0.8000.  NZ business confidence and capacity utilisation could do likewise for NZD towards the mid 0.7300’s, but we look to have hit a tentative top in the 0.7275 area, but rate differentials could still see further upside eked out for the reasons laid out in the opening paragraphs.  



We will refrain from listing the constant list of micro economic data reads out of Japan save for the PPI data out on Monday.  The last thing the BoJ want is a run on USD/JPY to derail the painfully sluggish rise in inflation, but it looks out of their hands at the moment, but if resigned to higher levels against the USD, it may change their outlook on the heavy asset purchases in flow, where we saw a minor reduction in 10yr buying prompting a mini taper tantrum last week.  Laughable really! 



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