Article20 November 2017Reading time 3 minutes

G10 FX Week Ahead Embrace the serenity

With US markets on Thanksgiving holiday from Thursday and few data catalysts in the G10 calendar, global markets may take a leaf out of the mindfulness playbook this week and embrace the relative serenity here and now, as opposed to anxiously looking ahead to what could be a turbulent end to the year.

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Majors: Fed and ECB minutes in focus, while UK Budget takes centre stage

EUR: Cooler runnings after Merkel's Jamaica coalition fails

  • The FOMC minutes (Wed) will continue to allude to diverging views within the committee and is unlikely inspire much upside in US rates or the USD this week. Nonetheless, we expect the markets’ Fed-obsession to come to a halt in 2018 as monetary policy re-pricing opportunities look to be greater elsewhere. The Thanksgiving holiday means that Congress will be in recess this week, which means any progress with passing the Tax Cuts and Jobs Act (TCJA) will be on halt for now.  
  • In a lacklustre week for Eurozone data (with just PMI figures to note on Thu), it'll all be about ECB communications for EUR markets over the next five days. The minutes to the Oct ECB meeting (Thu) will be surveyed for any active dissenters within the Governing Council, while investors will also be looking to speeches by Draghi (today), Couere (Tue) and Praet (Thu) for subtle clues over the timing of the ECB's first deposit rate hike. Though officials have made it clear that this will not occur until the taper process has concluded, we suspect EUR bulls will be looking to pounce as early as possible on any pre-emptive hawkish re-pricing at the front-end of the Eurozone rate curve. We currently see this as summer 2018 story – after the passing of the Italian election risk – which could result in EUR/$ trading up to 1.25. Ahead of this, we expect consolidation in the 1.15-1.20 range, with the fallout from the stalled German coalition talks adding a slight downside tilt to our EUR/$ bias this week. Expect the 1.1700/20 support area to hold for now
Source: ING
Source: ING

JPY: Cautious risk environment to keep yen supported

  • Global markets haven’t batted an eyelid to the House Republicans passing their version of the Tax Cuts and Jobs Act through – not least because the spotlight has been stolen by reports that US Special Counsel Robert Mueller has issued subpoenas to President Trump’s 2016 election campaign officials. Add to this noise surrounding US-North Korea diplomacy and it’s difficult to see anything but the US dollar losing out in an environment where policy and political uncertainty remains elevated. Therefore it's no surprise to see USD/JPY down at 112 in a slightly cautious risk environment.
  • The Oct trade figures released overnight - which continues to point to healthy export activity and a solid trade surplus - will be the highlight of an otherwise sparse domestic calendar this week. We note that Japanese markets are also on holiday on Thursday, which lends itself to thin liquidity in USD/JPY in the latter half of the week. Look for the 200-dma (111.75) to be tested this week, which could trigger a more pronounced move down to the low 111 area.
Source: ING
Source: ING

GBP: A Tory Chancellor always pays his debts... or does he?

  • The stage is set for Chancellor Hammond to showcase his vision of a post-Brexit economy in this week's Budget (Wed) and despite being hamstrung by a weaker set of OBR fiscal forecasts, it's clear that the global investment community are in dire need of some Churchillian-like words of inspiration over the future of Britain. While this is being billed as a ‘Budget for Homes’, what will be equally important is whether we see a marked step away from the austerity years and more focus on public sector spending – where anything beyond the already planned lifting of the 1% pay cap for employees could be seen as winning political brownie points with disillusioned voters. This may prove tricky for the fiscally prudent Hammond.
  • Either way, GBP investors may need to look beyond the minutiae of policy detail in the Budget this week and focus on the degree of economic optimism struck by the Chancellor – especially as this may be fairly indicative of how close the UK government is to breaking through the Brexit impasse. Reports that the Cabinet will back PM May's increased Brexit bill offer is indeed good news for GBP bulls. Also this week, BoE officials will be testifying to parliament (Tue). The panel will comprise of the more hawkish MPC members (Vlieghe, McCafferty & Saunders) – and while this lends itself to some more upbeat commentary, officials will aim to keep their policy cards close to their chests amid a key period of Brexit talks. We also see upside risks to the 3Q UK GDP second reading (Thu). We like GBP/USD upside and eye 1.3400 on a well-received Budget.
Source: ING
Source: ING

Dollar bloc: AUD & NZD come unstuck amid nervous global market

AUD: RBA minutes risks striking a cautious tone

  • High-beta currencies have come under pressure as the combination of a shaky global risk environment and an adjustment in positioning has weighed. We attribute less of the AUD's decline to local factors - noting that the labour market data last week was fairly mixed (strong full-time jobs growth was offset by disappointing wage inflation). Equally, iron ore prices have remained relatively stable around the $60/tonne mark - in line with our commodity analysts' views.
  • Looking ahead, the Nov RBA meeting minutes (Tue) and speeches by RBA officials - including Governor Lowe (Tue) - are worth noting. 3Q construction work (Wed) done will feed through in 3Q GDP estimates (Dec 6); after the huge 2Q upside surprise, consensus is looking for a more muted -2.3% QoQ print. AUD/USD 0.75 is a big psychological level to clear and only a further deterioration in global risk would take us below here.
Source: ING
Source: ING

NZD: Posting new lows for little fundamental reason

  • The kiwi has been quickly dumped by fast-money investors, despite the lack of any meaningful local catalysts. The RBNZ has already told us that the change to a dual-mandate would not affect its policy outlook; the OIS curve continues to price in a full rate hike in late 2H18, which seems fair in our view. The likely factor for the more recent selling may have been negative sentiment towards traditional activity currencies.
  • In the absence of a further downturn in equities, we would expect downside NZD pressure to recede. The kiwi will be looking for some catalysts for support; 3Q retail sales (Thu) and trade data (Fri) may offer some good news, while we also have the GDT dairy price auction (Tue). Next key support area for NZD/USD comes in around 0.6750. 
Source: ING
Source: ING

CAD: Questioning when the BoC will hike next?

  • After another disappointing CPI release, odds of a Jan-2018 BoC rate hike have slipped slightly to 37% (versus 40% prior). We do note, however, it wasn't all bad news - with the core-common CPI reading picking up to 1.6% YoY. Still, a fairly benign inflation backdrop - with the second-round effects of a strong CAD also feeding through - is likely to keep the BoC on hold for the foreseeable future. A rate hike is more like now at the Apr-2018 meeting, though the fallout from a small dovish BoC re-pricing should be fairly limited for the CAD. Trade data (Tue) and retail sales figures (Thu) may offer further clarity here.
  • Our broader outlook expects USD/CAD to remain around 1.27 in the near-term amid conflicting external factors - namely higher oil prices being offset by NAFTA re-negotiation risks.
Source: ING
Source: ING

EUR crosses: Scandi FX under pressure, still looking down from here

CHF: Ray of light

  • EUR/CHF has come back bid after a brief sell-off in Asia on the break-down of German government talks. There does not appear an obvious catalyst this week for EUR/CHF to break the 1.1710/20 highs, even though that should be the direction of travel over coming months. In terms of local inputs. Tuesday sees the October trade release and Wed. sees SNB’s Jordan speak on what Switzerland’s large current account surplus means for monetary policy – presumably a justification of the super-loose policy to offset a strong CHF.
  • More interesting might be Friday’s release of 3Q’s Industrial Production data. This has been showing some signs of life and any surprises could see the market re-assess 3Q17 Swiss GDP (released on the 30th). Swiss GDP has been more subdued than that of the Eurozone this year – an upturn would be welcome, but we doubt it would shift the SNB’s position of unchanged policy well into 2019.
Source: ING
Source: ING

SEK: In the free fall

  • SEK has been in a free fall given the mix of poor domestic data, concerns about the housing market, the fragile risk environment and the EUR strength. With the sentiment sharply turning against SEK, a break of EUR/SEK above 10.00 looks very likely.
  • Data-wise, the focus will be on the Riksbank’s Financial Stability Report (Wed) with a particular focus on the housing market comments (Oct house price fell by 3%MoM, the most since 2008). However, we think it is too early for the report to point material concerns about the decline of the housing market.
Source: ING
Source: ING

NOK: Sentiment & housing concerns offsetting oil prices

  • Like SEK, NOK has been under a heavy selling pressure following the disappointing breakdown of Q3 GDP and the global theme of fragile housing markets gaining tractions (with NOK being one of the “focus” currencies). The sentiment will remain the main driver of NOK this week.
  • On a relative basis, we see less downside to NOK vs SEK during the remainder of the year as the 14th December’s Norges Bank meeting is likely to deliver an upward revision to the current interest rate forecast due to the mix of NOK weakness and higher oil price. Data-wise, the Norway September Unemployment rate (Wed) should have a limited impact on NOK.
Source: ING
Source: ING

G10 FX Positioning: AUD & CAD longs look vulnerable

Source: CFTC, Bloomberg, ING as of 14 Nov 2017 (data reported with a lag). *Aggregate USD positioning against G10
Source: CFTC, Bloomberg, ING as of 14 Nov 2017 (data reported with a lag). *Aggregate USD positioning against G10