FX
G10 FX Week Ahead: How do you spell relief?
With US-China tensions offering a worrying background, markets will cling to any breakthrough in the US relief package talks to keep the risk rally going next week. The FOMC should not stand in the way of risk assets and once again reiterate its highly accomodative stance. USD may be stuck between contrasting factors, while JPY could be a key outperformer
USD: All about the stimulus bill
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| DXY | 94.6300 | Neutral | 93.9000 - 95.3000 | 94.0000 |
- Mounting tensions between the US and China have contributed to a halting in the risk-on rally, but have equally failed to trigger any substantial correction as equities continue to treat geopolitics with a good dose of complacency. The coming week will likely test such approach as tensions may escalate to a point where the US-China trade deal appears jeopardized, and bulls will inevitably pin some hope on positive developments on the US fiscal stimulus front (especially after the grim jobless claims figures) and on the ability of the Fed to once again prove market-supportive. The dollar will remain tied to risk-sentiment swings, although more bad data (US 2Q GDP figures next week, along with the key jobless claims) may put a lid on its ability to rally on risk aversion.
- Bipartisan talks around the next US fiscal stimulus bill are set to enter a pivotal phase: Republicans have delayed the announcement of their stimulus package till next week, at the end of which the US$600 payouts are set to expire. Some reports suggest the intention to bridge the existing payments so that they get reduced but not entirely cancelled. While this could hold investors nerves for a little longer, the size, content and timing of the stimulus package will be the key driver of market sentiment in the coming weeks. Turning to the Fed meeting, we remain in the view that there is still very little interest within the FOMC to display any hawkish tilt in their message, especially given fresh lockdown measures and concerning jobs data. A reiteration of the Bank’s accommodative stance appears nothing less than what markets – and the dollar – are pricing in, so we suspect a somewhat limited impact from the meeting.
EUR: Fading idiosyncratic pushes
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| EUR/USD | 1.1610 | Neutral | 1.1680 - 1.1540 | 1.1600 |
- The historic agreement on the EU Recovery Fund has helped EUR/USD ram its way to the 1.1600 level this week. Moving ahead, the notion of fresh solidarity within the Union creates a positive environment for the EUR to cash in on more dollar weakness, with the latter likely to be the main driver of future upsides for the pair.
- In next week’s European calendar the 2Q growth numbers will take centre stage (where a bad read should still be mitigated by the brighter recovery prospects after thanks to the EU Recovery Fund agreement), along with the German Ifo indicator, which is expected to confirm the improvement in sentiment showed in Markit’s PMIs surveys today. Inflation numbers will also be watched, although the implications in monetary policy terms are still set to be very limited. All in all, we expect idiosyncratic pushes to the EUR to fade next week, but the common currency should still prove amongst the most resilient in G10 to any recovery in the USD.
JPY: Time to shine?
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| USD/JPY | 106.20 | Bearish | 104.90 - 106.70 | 106.00 |
- The yen appears to be gaining momentum as geopolitical tensions emerge and the rally in risk assets is stalling. In particular, we see some room for the yen to emerge as the most attractive safe-haven option in G10 in the current environment. Indeed, the dollar has to deal with the combination of an unsupportive data-flow (and set to get worse, according to our economists) and a dramatic virus situation, which appear to have the potential to partly curb the benefits of risk-off. The other safe-haven, CHF, could still be facing the negatives of improving sentiment in the Eurozone.
- Should US-China tensions continue to evolve in a worrying direction – and in particular if trade concerns creep back onto investors’ radars – we expect the yen to be the main beneficiary in the short term. We could be looking at USD/JPY back to the 105.00 handle next week.
GBP: More of the same
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| GBP/USD | 1.2749 | Neutral | 1.2590 - 1.2860 | 1.2500 |
- It should be more of the same for GBP next week, with the currency remaining the laggard and the underperformer in the European G10 FX space. No progress on the UK-EU trade negotiations is expected and with news headlines suggesting an increased perceived probability of the no deal, there is a little to be optimistic about GBP. And with the EUR/USD likely to take a pause for a breath next week, so should the GBP/USD. For EUR/GBP, we see the cross breaching the 0.92 level this summer.
- It is a very quiet week on the UK data front, though the GBP reaction to the positive economic data have been muted away (given the overriding importance of the UK-EU trade negotiations). The GBP price action in response to solid June retail sales and July PMIs provided a case in point today.
AUD: Facing correction risk
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| AUD/USD | 0.7090 | Mildly Bearish | 0.7000 - 0.7140 | 0.6900 |
- The boost from the risk-on rally and the still very relaxed Reserve Bank of Australia comments around the strength of the AUD has now worn off. If market sentiment fails to show yet another proof of extraordinary resilience next week, AUD appears to be the most vulnerable to downside corrections due to: a) the highest correlation in G10 with CNY, b) lingering virus emergency situation in Australia and c) a worsening recovery outlook.
- Data-wise, inflation numbers for 2Q will stand out: the risk of a negative year-on-year read appears quite material, although the implications for RBA monetary stance are not many at this stage.
NZD: AUD/NZD still set to head lower
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| NZD/USD | 0.6631 | Neutral | 0.6560 - 0.6690 | 0.6500 |
- The NZD does not appear in a very safe spot as China is back at the centre of global tensions and the risk of another round of trade tensions may start to loom on the horizon.
- Still, the Kiwi$ presents less idiosyncratic downside risks if compared to the AUD, which suggests that AUD/NZD may continue to drift lower in the near futures, and we continue to expect a move towards 1.0600. NZD/USD will remain strictly reliant on risk sentiment, and if good news on the US fiscal bill comes to the rescue, the 0.6600 level is set to face significant pressure next week.
CAD: Less vulnerable than its peers
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| USD/CAD | 1.3421 | Neutral | 1.3340 - 1.3500 | 1.3400 |
- USD/CAD is now trading close to its June lows as it moved back below the 1.3500 level. The path ahead for the loonies is not appearing very smooth as trade tensions rise and data are casting doubts around the US economic recovery (Canada is inevitably highly exposed to US economic troubles).
- Next week’s calendar in Canada includes May’s GDP numbers, where markets will try to derive any minimal rebound in activity as lockdown measures started to be eased. Eyes will remain on the developments in oil prices, as trade tensions are taking a toll on crude, with WTI pressuring the 41.00 level as we write. All in all, CAD has had a less overstretched run in the past few weeks compared to its peers AUD and NZD, is less exposed to China and its lingering net short positioning appear to suggest a relatively more limited downside potential.
CHF: Solid EU sentiment putting a lid on gains
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| EUR/CHF | 1.0730 | Neutral | 1.0690 - 1.0770 | 1.0700 |
- EUR/CHF jumped on the back of the EU Recovery Fund agreement this week but fell short of breaking the 1.08 level. As global tensions rise and safe-haven demand shows fresh signs of life, the short-term outlook for the franc appears to be improving. Still, European sentiment now appears to have materially consolidated (as PMIs added fresh manufacturing hopes), which may imply a floor to EUR/CHF.
- Some data in Switzerland will also be watched, and in particular the KOF leading indicator, which appears set to show a material jump as the Swiss economy kept going back to normal in July.
SEK: Taking a pause for a breath
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| EUR/SEK | 10.2730 | Neutral | 10.2000 - 10.3890 | 10.4000 |
- EUR/SEK decisively breached the 10.30 level and trends towards our year-end target of EUR/SEK 10.00. But following the SEK gains this week, we look for a pause next week and EUR/SEK to stay range bound as the EU summit effect is now fully priced in while the uncertainty about the US fiscal stimulus prospects should derail any meaningful short-term risk assets rallies, including SEK.
- On the data front, the focus is primarily on the July Economic Tendency Survey (Wednesday) and June retail sales (Tuesday). The former should be more meaningful for SEK though the direction of the general risk sentiment will be more important for the SEK price action. Hence, we look for stable EUR/SEK next week.
NOK: Purely driven by global risk sentiment
| Spot | Week ahead bias | Range next week | 1 month target | |
|---|---|---|---|---|
| EUR/NOK | 10.7030 | Neutral | 10.5670 - 10.8480 | 10.6000 |
- The high beta NOK (the krone having the highest sensitivity to risk in the G10 FX space) benefited from the EU summit prompted risk rally, yet the currency now gave up all of its gains as the uncertainty about the US fiscal stimulus and the US-China tensions punished the risk sensitive NOK. Given our neutral view on risk next week, we look for a range bound EUR/NOK.
- It is a very quiet week on the Norwegian data front, with June retail sales (Tuesday) and July unemployment rate (Friday) unlikely to effect the NOK price action.
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This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more