Article27 November 2017Reading time 2 minutes

G10 FX Week Ahead: Dollar haunted by Voodoonomics

Tightening financial conditions in China – characterised by rising bond yields and the biggest three-day decline in the Shanghai Composite equity index since June 2016 – has instilled a sense of nervousness within global markets. The safe-haven JPY could be a currency trader's best friend amid a jam-packed week in the US – which could see rogue Republican senators vote down the Trump tax bill, a de facto changing of the guard at the Federal Reserve and the structural low US inflation concerns of investors vindicated in the data.

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Majors: Can the dollar find support from tax cuts, Powell or inflation?

EUR: Ain't no stopping us now... we're on the move to 1.20 (again)

  • The core PCE inflation reading (Thu) will be the highlight of a busy US calendar in the week ahead, with investors mindful of the Fed's structural low US inflation concerns as noted in the latest FOMC minutes. Core PCE is the central bank's preferred measure of inflation - and with the prior month's reading running significantly below the 2% target at 1.3% YoY - it's no surprise why the Fed doves are sounding the alarm. We may need to see more than just a trickle up to 1.4% YoY (consensus) to spur any major inflationary sentiment. In addition, we'll also have the Senate confirmation hearing for incoming Fed Chair Powell (Tue) - while outgoing Fed Chair Yellen will also separately testify to Congress (Wed). Markets will be closely watching for any subtle disparity of views on Fed policy and big picture outlook for the US economy. Data wise there's also trade balance (Tue), second estimate of 3Q US GDP (Wed) and ISM manufacturing (Fri) - among a host of other second-tier releases - to note.
  • The focus will also be on inflation data in Europe this week, with the Nov flash EZ CPI release due (Thu). Consensus is looking for a slight uptick in both the headline and core readings; while the latter may only nudge up to 1% YoY, this could be marginally supportive for the EUR - given that EZ markets are arguably underpricing similar inflation and policy risks relative to their US counterparts.
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JPY: A currency trader's best friend this week?

  • In the US, there will also likely be a Senate vote on the Tax Cuts and Jobs Act (TCJA) - though it's difficult to see that what gets passed isn't (a) watered-down to meet the Senate's stricter fiscal rules and (b) not questionable in its actual benefits for the real economy. If the bill does get through the Senate - it would still need reconciling between both houses (the hard part). But on sentiment, and the ever so slightly higher odds of US tax reforms, it could be mildly supportive for the USD. Equally, and rightly so in our view, investors are becoming a bit more cleverer in understanding the messy US politics and big picture limited reflation impetus of this tax bill - meaning that any major USD upside seems unlikely.
  • On the flip side, the global risk environment remains cautious - with the latest story a potential wobble in Chinese markets that draws parallels to the summer of 2015. This could be spilling over into some JPY safe-haven flows. The holiday period lent itself to thin USD/JPY liquidity and potentially an overshoot in the downside move; we would expect some stability in the 111.00-112.00 range given conflicting factors, with the $ potentially recovering some of its losses. Japanese CPI data and 3Q capital spending (both Thu) may be a sideshow for USD/JPY this week.
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GBP: Hoping for a 'gentlemen's agreement' over a Brexit transition

  • While a rally in GBP/USD was our conviction call last week, admittedly it was more of a bearish USD story - as opposed to a isolated bullish GBP move. The pair has moved up to the 1.33 level but has failed to push on - likely due to the lack of appetite amongst investor to take a clear directional view ahead of the key Brexit-focused Dec EU summit. The next couple of weeks will see a lot of noise in the build up to this - noise that we think could be ultimately positive for GBP, especially if it continues to ascribe a 'good chance' to there being progress made in Brexit talks. Reports of PM May being ready to pay a £40bn Brexit Bill is constructive - though we think GBP's price action will be more contingent on the prospects of whether we get a 'gentlemen's agreement' over a transition deal.
  • The UK calendar is light - watch out for the BoE's Financial Stability Report (Tue), UK confidence data (Thu) and manufacturing PMI (Fri). Latest foreign investor holdings of UK gilts data in the BoE monetary stats (Tue) will be quite interesting as well - especially to see whether short-term domestic political risks have dampened UK asset sentiment. We think the bar is fairly high for domestic politics to actively weigh on GBP - the real focus will be on factors that could meaningfully delay Brexit talks. 
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Dollar bloc: CAD vulnerable to negative OPEC and GDP surprises

AUD: Weak investment epitomises 'lowflation' economy

  • Slightly dovish RBA talk has left the AUD curve pretty flat, with markets barely pricing in a full 25bp rate hike in 2018. We think the flattening story looks to be done - and it'll be up to the data to determine future movements. After a stunning 3Q construction work done print (+15.7%), the data focus shifts to the 3Q Private Capex report (Thu). It's no surprise to see Australian investment weak when you look at a long-run time series of capex spending; the 5-year average trend in the mid-2000s was around 3.2% quarterly growth in capex, while the latest equivalent reading has slumped to -2.7%. That puts some context on this week's reading - where a modest 1% QoQ  pick up in 3Q17 won't change the negative historical average much.
  • We look for AUD/USD to remain supported in a benign US rate and global risk environment, with the bias more skewed towards a return up to the 200-dma average (0.7695).
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NZD: Still pricing in an RBNZ uncertainty premium

  • Acting RBNZ Governor Spencer will testify to the New Zealand parliament (Wed) this week, though discussions may be more related the Financial Stability Report. Any macro discussions will be interesting, especially in the context of gauging the central bank's latest thoughts on how they are incorporating the new Labour government policies. Here we already know that the RBNZ policy reaction function hasn't been materially thwarted, with a chance of a 2H18 rate hike still likely in an economy that has little slack left.
  • However, inflation surprises in 1H18 hold the key to any RBNZ re-pricing story. For now, we look for NZD to remain buffered by a soft USD environment and this could see stability in the 0.68-0.70 range (risks to the bullish side). 
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CAD: Busy week with OPEC and GDP data in focus

  • 3Q Canadian GDP (Fri) is the highlight of the domestic calendar; after the large negative surprises in Sep trade and retail sales data last week, the risks are tilted to the downside. This will put a reality check on the Canadian growth story from earlier this year - which in part was down to base effects - as opposed to a massively overheating economy. It's therefore no surprise to see the CAD OIS curve pricing in little prospects of a Jan-2018 BoC rate hike (33%). The risks are still that the curve flattens further, though in the absence of a string of disappointing data releases - the repricing in the Canadian 2-year swap rates looks to be largely done. 
  • The OPEC meeting (Thu) will be the focal point for oil markets and reports of an extension to output cuts looks to be supporting crude. This might keep CAD supported too, with $/CAD moving to the lower end of the 1.26-1.28 range.
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EUR crosses: Will buoyant Swedish GDP help support SEK?

CHF: Strong industrial activity points to healthy 3Q Swiss GDP

  • EUR/CHF ended the week on a strong footing despite some very strong 3Q17 IP data (+8.6% YoY, highest since early 2008). This imparts upside risk to 3Q17 GDP released on Thurs, where consensus now 0.6% QoQ, but some analysts are going for 1% QoQ. However, we doubt whether that will lift CHF.
  • Instead, we continue to favour EUR/CHF, probably to a new high for the year this week. Triggering the move could be any progress on Merkel forming a coalition with the SPD, or any upside surprises with the flash release of Eurozone CPI. EUR/CHF looks well supported, SNB still dovish.
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SEK: Solid 3Q GDP may lift the krona (a bit)

  • We look for EUR/SEK to stay around the 9.90 level as the recent negative sentiment towards the currency may have reached its near-term peak, while Sweden Q3 GDP (Wed) should print above consensus 1.1% YoY - the near-term Swedish growth momentum remains strong and the recent weakness in the housing market is unlikely to have affected 3Q data.
  • However, with Stibor under a downward pressure ahead of the year-end (due to resolution banking fee and the QE related liquidity) and concerns about the housing market, EUR/SEK should stay flat this week rather than falling materially.
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NOK: Taking a breath after the sell-off

  • In line with SEK, we expect NOK to stabilize following the sell-off over the previous weeks.  We don’t expect this month’s highs of EUR/NOK 9.8000 to be breached. Given the NOK’s weakness, we see scope for somewhat more hawkish NB meeting later in December, providing some caution NOK.
  • On the data front, we except Nov Manufacturing PMI (Fri) to rise again, mirroring the strong PMIs in the EZ. Oct retail sales (Thu) should increase while the unemployment rate (Fri) should remain at 2.4%. All this should provide some marginal support to  NOK.
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