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21 December 2020

G10 FX Week Ahead: Driving the deals home for Christmas

As markets wind down after a turbulent year, investors remain focused on whether politicians in Europe can drive a Brexit deal over the line and also whether Congress can avoid a government shutdown. We are biased towards progress on both and a continuation of this year's soft dollar environment

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British Prime Minister Boris Johnson welcomes European Commission President Ursula von der Leyen to 10 Downing Street

USD: Avoiding shutdown

  Spot Week ahead bias Range next week 1 month target
DXY 89.8450 Mildly Bearish 89.2000 - 90.2000 88.0000
  • The dollar continues to drift lower, partly encouraged by the Federal Reserve’s recent re-iteration of its plans to keep the policy rate on the floor until 2024. Perhaps forward guidance is working after all. The near-term challenge to this benign dollar decline probably comes from Congress. Time has now run out on a stop-gap funding measure and Congress needs to vote quickly on a FY21 budget to avoid a prolonged government shutdown. Approval of both the FY21 budget and a $750-900bn stimulus package over coming days would be greeted warmly by investors and maintain the dollar’s soft tone.
  • US data this week sees December consumer confidence and November personal income and spending data. On the latter, the narrative is building around consumers digging into savings to finance consumption while income declines, but a rise in spending may raise some more doubts about the US consumer into the New Year. Overall, however, we suspect the dollar will continue to drift lower into year-end. 

EUR: EUR/USD trades through 1.20 and the sky didn’t fall in

  Spot Week ahead bias Range next week 1 month target
EUR/USD 1.2264 Mildly Bullish 1.2200 - 1.2360 1.2500
  • EUR/USD is heading into the final weeks of the year at its highs and the move above 1.20 has not elicited much, if any, response from the European Central Bank. Perhaps calming the ECB are issues such as: i) European equities continue to rise and ii) market-based expectations for eurozone inflation have not been priced lower. If topics such as the US stimulus/budget and Brexit can be resolved over coming days, we’d expect this powerful dollar bear trend to continue carrying EUR/USD towards its next major target of 1.25. 
  • In terms of local inputs in the week ahead, the scheduled calendar of European events is certainly thinning out quickly and we can perhaps only point to Tuesday’s release of December eurozone confidence (a small decline expected) as a clue to how much broadening lockdowns across Europe are dampening sentiment. Probably not enough to dent the euro. Additionally investors might greet the European Medical Agencies approval of the Pfizer/BioNtech vaccine this week and its rollout across Europe.

JPY: BoJ accepting a stronger yen

  Spot Week ahead bias Range next week 1 month target
USD/JPY 103.21 Mildly Bearish 102.50 - 104.00 102.00
  • It has been good to see USD/JPY trade below 103 and one does wonder whether the overhang of the US Treasury currency manipulator report has recently been deterring Asian nations from sovereign or quasi-sovereign sales of local FX against the dollar for purposes of competitiveness. The ever-steepening US Treasury curve may also be encouraging Japanese investors to raise their USD hedge ratios now that higher yields are available at the long end of the curve.
  • After Friday’s Bank of Japan meeting, the Japanese calendar is now very light into year-end. The highlight will probably be the November retail sales and jobless data. As long as USD/Asia in general stays offered, we think authorities in Tokyo may be a little more comfortable with this gentle USD/JPY decline – though any approach to 100 will no doubt spark a pick-up in verbal intervention.

GBP: Almost there …

  Spot Week ahead bias Range next week 1 month target
GBP/USD 1.3510 Bullish 1.3280 - 1.3900 1.3600
  • The UK-EU trade deal remains our base case, despite the very latest newsflow (which translated into a modestly weaker pound today). In our view, plenty of progress has been made already (with the issue of state aid seemingly resolved) and we expect the (rather political) issue of fisheries to be resolved as well. While the timing remains uncertain (we are inclined to expect a resolution over the weekend, but a further delay into next week cannot be ruled) the eventual agreement should provide a modest boost to GBP. EUR/GBP is to dip below 0.89 and with EUR/USD grinding higher, this suggests GBP/USD pushing to the 1.38 level next week.
  • As we have argued for some time, we perceive the GBP reaction function to the UK-EU trade negotiation outcome as asymmetric, with modest upside in the case of a deal but profound downside in the event of no deal as fairly limited risk premium is currently priced into GBP. This is evident in our short term financial fair value model (no risk premium priced in) as well as in speculative positioning (with the speculative community now being net long GBP/USD). It is a very quiet week on the UK data front next week, with the Brexit negotiations remaining the overwhelming driver of the pound.

AUD: Keep an eye on iron ore and China during Christmas

  Spot Week ahead bias Range next week 1 month target
AUD/USD 0.7590 Mildly Bullish 0.7560 - 0.7680 0.7400
  • The quiet data calendar – except for November retail sales on Monday – in the remainder of the year will leave the Australian dollar driven by external factors alone, especially early next week when we may see the results of developments on the US fiscal stimulus front and Brexit. Looking back to this past week, the positive surprise in unemployment data is further endorsing our view that the Reserve Bank of Australia's easing cycle has peaked.
  • Iron ore will remain another interesting factor to keep an eye on as the recent surge in prices (its sixth consecutive week of gains) exceeded the broader rally in metals. We struggle to see the latest iron ore levels as sustainable into the new year, as both an improving supply picture (especially in Brazil) and a cooling off in Chinese demand could trigger a significant correction. With the US dollar struggling to rebound and risk assets staying supported, this appears one of the two key risks to the AUD looking ahead. The second one is related to any further escalation in the Australia-China trade tensions, to which AUD has retained a very complacent stance: the lack of AUD reaction to China’s ban on Australian coal this week was a case in point.

NZD: Net-long positioning getting in the way?

  Spot Week ahead bias Range next week 1 month target
NZD/USD 0.7120 Mildly Bullish 0.7080 - 0.7200 0.7000
  • The New Zealand dollar has had a good week as upbeat global sentiment paired with a rebound in GDP that exceeded expectations. Third quarter growth inched above zero (+0.4%) in the year-on-year gauge with a strong 14.0% quarter-on-quarter, suggesting a fast economic recovery and limited impact of new restrictive measures in the third quarter. That was probably the last piece of the puzzle markets needed to cement their view that the Reserve Bank of New Zealand will not cut rates in the next year. Also, NZD was helped by Finance Minister Grant Robertson’s comment on the currency that pointed to a relaxed stance on the recent appreciation.
  • NZD is entering the holiday season more comfortably than AUD if we consider the lack of clear idiosyncratic catalysts for a correction, but it remains the only overbought commodity currency in the G10 (net longs vs USD were at 17% of open interest as of last week, according to CFTC data), so some position-squaring may get in the way of further gains. 

CAD: Data momentum is hard to dent

  Spot Week ahead bias Range next week 1 month target
USD/CAD 1.2750 Mildly Bearish 1.2650 - 1.2800 1.2700
  • The Canadian dollar's rally lost some steam after a very strong first half of the month, but USD/CAD looks set to remain in a depreciating trend on the back of USD weakness and still solid CAD fundamentals. Data releases this week (CPI, housing starts) are suggesting that the Canadian economy maintained a good pace of recovery in November, while oil prices continue to be boosted by hopes of a rebound in demand as vaccines are rolled out.
  • Next week, the highlight in Canada will be October’s growth numbers. A second wave of the virus took a toll on the recovery and the MoM growth rate should have slowed to around 0.4%, according to our economics team. Still, we doubt that (or slightly worse numbers) will have a strong impact on CAD considering the positive signals from higher-frequency economic data. A fiscal stimulus deal in the US over the weekend and a Brexit deal may put more pressure on USD/CAD, which may enter the festive break from the 1.26-1.27 region. 

CHF: Unwelcome intrusion?

  Spot Week ahead bias Range next week 1 month target
EUR/CHF 1.0835 Neutral 1.0780 - 1.0860 1.0900
  • The highlight of this last week has been the US Treasury designating Switzerland a currency manipulator – a move flatly rejected by Swiss authorities. We get the sense that the US does not feel that Switzerland is taking this threat seriously enough and that the Swiss can no longer hope to run a close to $50bn annual trade surplus with the US, while intervening heavily. This type of activity – preventing the orderly adjustment of the Balance of Payments position by resisting the dollar drop - is exactly what the US Treasury report seeks to address. This is certainly unfinished business.  
  • Away from the world of currency manipulation, EUR/CHF will be driven by Brexit developments and any signs from the weekly CHF sight deposit data that the Swiss National Bank has had to accelerate FX intervention. Given our slight bias that a Brexit deal is concluded, we favour EUR/CHF moving to 1.09 over coming weeks.

NOK: Benefiting from the constructive external environment

  Spot Week ahead bias Range next week 1 month target
EUR/NOK 10.5270 Mildly Bearish 10.4000 - 10.6370 10.7000
  • After getting a boost from a more hawkish than expected Norges Bank December meeting (where the central bank brought forward the timing of the first rate hike to around mid-2022) and the general soft USD environment, we expect EUR/NOK to consolidate its gains next week and trade around the EUR/NOK 10.50 level. The pair may briefly break below 10.50 if there is an agreement on the US fiscal stimulus, but the year-end NOK trading should be more muted.
  • It will be a very quiet week on the Norwegian data front. The October unemployment rate (Tuesday) should be a non-event for the krone.

SEK: Good ending to a very strong year

  Spot Week ahead bias Range next week 1 month target
EUR/SEK 10.1240 Mildly Bearish 10.0000 - 10.2210 10.2000
  • The constructive risk environment next week should keep EUR/SEK supported but it is unlikely to be strong enough to push the pair below the 10.00 level, particularly as liquidity will be gradually evaporating into year end. We see more SEK gains in 2021 with the currency set to benefit from the expected recovery in the global trade. The Swedish krona has been the best performing G10 currency so far this year.
  • On the data front next week, the main focus will be on the December Economic Tendency Survey and November retail sales (both on Tuesday) but neither is to have a meaningful impact on SEK.
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