Focus of the day:
“USD: Fed Ends the Correction. Bullish.
The Fed surprised markets by sounding more hawkish than expected, driving a re-pricing in the probability of a December hike. We now expect a more bullish USD going forward, as investment works its way into the US. Strength is likely to be concentrated against G10 currencies and low-yielding AxJ. Going forward, data will be increasingly important for USD as a December hike is now in the balance. On that front, we will watch payrolls next week.
EUR: The Draghi Put. Bearish.
We expect EUR to be a clear underperformer in this environment. The divergence in monetary policy should encourage funding in EUR, and we think that EUR could retest lows of the year. However, we would stand by our previous assertion that a combination of ECB action, including a deposit rate cut together with further QE in a broadly risk-positive environment, would be required for sustained EUR weakness.
GBP: BoE in Focus. Neutral.
We have turned tactically bearish on GBPUSD, targeting 1.4850. The BoE’s Carney has started to sound a bit more dovish and the GDP data in the past week undershot market expectations slightly. With the pace of growth now slightly below the level that Carney previously mentioned was required for a rate hike to be considered, there are risks of more dovish commentary from the bank. The services PMI data and BoE Inflation Report will be important to watch.
CHF: Long USDCHF Comes Back into Play.
Diverging monetary policies between the ECB and the Fed support long USDCHF positions again. Technically USDCHF has broken through the high of 0.99 in August, supporting some further upside momentum. Aggressive ECB policy in December may support the SNB cutting rates further in coming months if it sees a risk to EURCHF falling too fast. The SNB’s Zurbruegg said that the bank would need to reassess and that you can’t tell in advance how low rates could go.
AUD: A Short-Lived Rally. Bearish.
We believe that the period of AUD strength is behind us and now expect further losses. In addition to the broader strong USD environment, the risks of a cut at the upcoming RBA meeting are rising as inflation undershot in its latest release. Iron ore prices have been coming off as well. AUD could now catch up with its commodity currency peers, heading back towards the lows.”