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Forex Commentary from Morgan Stanley

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Forex Commentary Morgan Stanley

Morgan Stanley FX Morning  – Forex Commentary

Oil markets have been out of focus as prices have stayed in a US$43-48 range. This range has allowed broader markets to stabilise as they digest the potential for central banks to target steeper yield curves. For oil insights we are also watching China data, where crude imports are strong, up 13.5%Y over January to August. China’s state council recently said that it would use stronger fiscal policy, which could stabilise commodity prices. Intraday FX investors may become more sensitive to oil-related news in the coming week as OPEC meets in Algiers. Saudi Arabia and Iran have had a pre-meeting in the past two days but are reported to have not reached any agreement. This week’s surprise drop in US oil inventories and the generally weaker USD have supported prices for now but, as oil prices will likely be volatile, we prefer to play via being short the CADNOK cross,  highlighting economic data divergences.

CAD CPI watched: CAD is still more sensitive to oil prices than NOK, and this may be due to the potential for a central bank policy change in Canada. We will get more clues on its path for policy today, with both CPI and retail sales due this afternoon. Canada remains within an adjustment process after heavily investing in the oil market and seeing the oil price halve. The BoC’s Poloz’s speech this week gave little indication on the probability of another rate cut but the last monetary policy statement did suggest there could be downside risks to inflation, so we will watch that data point today. We still promote a short CADNOK trade which has been further supported yesterday by Norges Bank no longer looking to cut rates, in contrast with the BoC. The Exhibit below shows the diverging fiscal policies too, where Norway has been expanding spending over the past year, which has helped growth to stabilise. Both oil economies have seen housing booms but Norges Bank now seems less worried about the risks as growth in the non-oil sector has stabilised.

GBP: Data to guide BoE: GBP has become less sensitive tooil over recent weeks, suggesting that the main driver is economic data and the impact that may have on monetary policy and investment in the UK. Yesterday the BoE’s Forbes saying that further stimulus was not required supported GBP but the comment shouldn’t have surprised markets at all as she never voted for starting the gilt purchase programme at its August meeting. However, Forbes did suggest that she would not vote to stop the purchase programme now. Business investment into the UK will depend largely on the certainty over the new rules after Brexit. Divergences within the Conservative party are starting to arise over the timing of the triggering of Article 50 and potentially if it will be a hard or soft Brexit. Yesterday Foreign Secretary Boris Johnson was giving a speech saying that Article 50 would be triggered early next year and there would be a jumbo trade deal with curbs on immigration. PM May soon said that the decision would be hers when to trigger. This uncertainty should keep GBP as an underperformer.

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After the Fed, now watch US data: We have been suggesting that USD should decline another 4-5% from here, focusing particularly on high yield currencies. While for risky assets it doesn’t matter whether the Fed hikes in December or not, market focus will be on upcoming US data, which could determine how many hikes the market prices for 2017 and beyond. The US’s economic surprise index has turned sharply lower since the start of August, which could be reflective of the uncertain political environment in the coming months. Businesses are reporting less positive credit conditions as suggested by the US credit managers index, which in August fell to 52.0 from a high of 54.6 in April; this index follows ISM closely. We can use US inflation expectations as a gauge for the US economic outlook. Here, even as oil prices have risen in recent days, the Fed’s dovish rate path wasn’t enough to boost inflation expectations, with the 5y5y swap falling from 2% to 1.9% today.



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Nomura Global Markets Research – Trump tracking

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Nomura Global Markets Research: FX Insights – Trump traking: The “eye of the storm” moment?

Political uncertainty is always on the horizon, and one thing we’ve learned in 2016 thus far is politics has stumped the consensus on FX. November may have a few key events: the UK is likely to have its first “post-Brexit” budget, Italy will hold its constitutional referendum (possibly 6 November) and of course there is the US Presidential election (8 November). So we may reflect back on this post-Brexit summer period as the “eye of the storm”. That is the calm region at the centre of a storm, followed soon after by its most damaging winds and intense rainfall. Could Donald Trump provide that? His tax cuts could provide a boost for risk assets, but trade rhetoric could see MXN, CAD, CNY and US trade-dependent currencies significantly underperform. Mr Trump’s chances of victory are following a similar pattern to that of what was the “unlikely probability” of a Brexit. For US presidential elections, what can be telling tends to be the swing state polls where the tracker metrics show Mr Trump’s chances have improved considerably of late. Winning the Presidency without also winning Florida is very rare. Since 1960 this has happened only twice. Interestingly, the last time it happened was in 1992, when a Clinton was on the ticket. The probability of Mr Trump winning Florida stands at 49.6%; it’s tight.

The Trump-implied probability is rising

FiveThirtyEight’s 2016 US election forecasting model is likely to be one of the market’s first ports of call for interpreting the likelihood of a Trump presidency as we approach the 8 November election date. It keeps a rolling update on the polling, collected by RealClear Politics and other sources, then weights accordingly each poll by analysing the historical accuracy and methodology of each firm to produce a probability of a Trump win (see Figure 1). There are three main models that they quote, overall showing that Mr Trump’s chances cannot be “written off” yet.

Fig. 1: Just because the probability is low, doesn’t mean it can’t happen


As we have seen with political binary events before, as long as the probability of the “market negative” stays well away from the 50% level, the overall market pricing of the event will remain limited. However, the ebb and flow of price action could start to become sensitive to it, especially if the market believes the implied probability (after a political event for example) could be higher than polling suggests.

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Keep an eye out for the swing states or “tipping points”

It is clear that the Republicans are at an Electoral College disadvantage. This is why, when there is only a few percentage points’ difference between Donald Trump’s polling and Hilary Clinton’s, it still translates into a relatively small probability of a Trump victory. The election forecasting is a product of both national and state-wide polling. State polling on an individual basis is interesting but not necessarily telling for the national outcome in all cases, especially if polling is tight. What will be interesting is the state of polling in the “swing states” where it’s not clear which candidate should win.

Fig. 2: Donald Trump’s chance of winning is non-trivial


Fig. 3: Swing states to watch


We advise keeping an eye on the “tipping point states” that carry the highest Electoral College seats so also carry with them a possibility of tipping the election either way. FiveThirtyEight put the probability of Florida providing the decisive vote in the Electoral College at 17.1%; combine that with Ohio (11.3%), Pennsylvania (11.7%), Virginia (7%) and North Carolina (6.5%), and you have a probability in excess of 50% that one of these will be the state to “tip the election”. Winning the Presidency without also winning Florida is very rare. Since 1960 this has only happened twice. Interestingly, the last time it happened was when Bill Clinton was on the ticket in 1992. Mr Trump is currently predicted to lose Florida but, with FiveThirtyEight putting the probability of a win at 49.6%, it’s still to play for.

Fig. 4: Donald Trump has a chance in Florida and Ohio, which could “tip the election”


Even though it’s “unlikely”, when it comes to politics it’s prudent never to rule anything out

Polling is not a perfect science. Brexit was an example of that, with many other examples over the years. The argument in favour of political polling for the US election though is that there is a lot of historical data to work with (as this is a recurring event) and forecasters have learned from the errors of past. However, Donald Trump’s campaign has consistently surprised political forecasters, who did not expect him to win the Republican nomination in the first place. So could it be that, as with the Brexit polling, there is a factor that pollsters are missing?

Watch out for the possible Republican convention bounce

This week has seen the start of the Republican convention and Donald Trump formally nominated for president by the Republican Party. There is typically a “convention bounce” in the polls for the candidate in the weeks following that is worth taking note of. It doesn’t always happen. Mitt Romney’s experience in 2012 is an example of that, where forecasters were looking for a 4% bounce, but instead saw a 1% decline in support. Nonetheless, the broader historical evidence is convincing, so any pick-up in Trump support following the convention should be taken with a pinch of salt, unless it becomes a persistent level of higher Trump support.

Fig. 5: The post-convention bounce in voter preference


What a Trump presidency would mean for markets

A Trump presidency could lead to market uncertainty; we focus on the trade aspect

Donald Trump, with Mike Pence as his running mate, will be on the ticket come 8 November with a “non-trivial” chance of becoming the next President. There is no justification then for dismissing the potential impact of a Trump presidency on markets, especially when some of Mr Trump’s “positions” would have potential trade impacts.

The market reaction would not be across the board “risk-off”
It is not immediately clear what a Trump presidency would mean for risk markets. Mr Trump’s original tax plan had sizeable tax cuts (see here), although his team plans to release an updated tax plan soon, perhaps even this week at the convention, so this could be revised. Nonetheless, if it looks something like that of a typical republican tax cut plan, would it not be a fiscal stimulus to the benefit of US equity markets?

An argument against the “doom and gloom” view is that if Mr Trump were to win the Presidency, it is likely that in the process of doing so he may have “softened” some of his extreme stances. This may turn out to be true, but he has repeatedly pointed out his intention to declare China immediately a “currency manipulator”, to “build a wall” and reminded us that he is prepared to “rip up NAFTA”. Even if he were to achieve just one of those it would still have a profound impact on the respective markets.

Therefore, as we explained in Trading the Trump factor (6 June 2016), rather than trading broad risk assets in the event of a Trump win, we judge it is the US tradedependent currencies of MXN, CAD, CNY and Asia that would underperform.

In terms of events to come, we have the Democrats convention on 25-28 July, but then it should be relatively quiet before the TV debates start on 26 September which should signal the more intense campaigning period.


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Credit Suisse Technical Analysis – May 27

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Credit Suisse Technical Analysis

Credit Suisse FX Daily

Today’s highlights:

■ GBPUSD’s spotlight stays on 1.4766/71 – the trendline from the 2008 low, the May 2016 high and 200-day average.
■ EURGBP’s near-term strength ideally caps below .7704/11.
■ EURUSD ideally draws fresh selling on the approach of price resistance at 1.1244.
■ USDCHF’s broader risk can remain topside whilst holding above key support at .9841/.9789.
■ USDJPY remains capped beneath key price resistance at 110.60/67.
■ EURJPY below 122.26/17 can see scope for 121.94 initially, ahead of a test of key trendline and price support at 121.49/33.
■ AUDUSD’s bullish “outside” day turns the focus onto .7254/61 where fresh selling is expected to show.
■ NZDUSD’s immediate risk can stay lower whilst capped beneath .6808/25.
■ USDCAD is holding above support from the 38.2% retracement at 1.2911.

Today’s trades/positions:

■ EURUSD: Short at 1.1199, stop above 1.1256 for 1.1100.
■ USDJPY: Short at 109.90, stop above 110.70 for 105.90.
■ GBPUSD: Long at 1.4480, stop below 1.4403 for 1.4745. Go long on break of 1.4780.
■ USDCHF: Long, stop below .9746 for .9992. Add to long on pullback to .9840.
■ AUDUSD: Short at .7330, stop above .7265. Cover shorts at .7120.
■ NZDUSD: Short at .6820, stop above .6860 for .6670.
■ USDCAD: Holding a long. Place the stop below 1.2740 for 1.3310.
■ EURJPY: Short at 123.75, stop above 124.70 for 121.60.
■ EURGBP: Short at .7750, stop above .7795 for .7530.

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Barclays Technical Analysis: USD to outperform in major FX space

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Barclays Technical Analysis

US bonds sold off on Friday, with the 10 year yield posting a small reversal candle. This is helping to provide a bid for the USD against major FX currencies. EURUSD posted a weekly reversal candle and looks to extend downside while USDCHD and USDJPY extended their recent gains following last Tuesday’s daily reversal candles. We expect the USD to continue to strengthen in the short term.

Tactical opportunities

•  USDJPY upside extension looks towards our targets near 108.75 before a top can form.

•  EURUSD weekly topping candle signals lower. A move below 1.1360 would open targets towards the 1.1215 range lows.

•  USDCHF rally extension points towards the 0.9800 range highs next.

FX Chart Focus and Levels

AUDUSD downside range break lacks previous levels of activity. We expect a period of consolidation. A beak below 0.7330 on increased volume is needed to signal lower towards 0.7210.


Daily volume rankings and highlights


FX at a Glance

EURUSD:  A weekly topping candle encourages our bearish view. A move below our initial targets near 1.1360 would signal lower towards 1.1300 and then the 1.1215 range lows.

USDJPY:  No change. We are bullish in the short term and look for a squeeze higher in range towards the 108.75 area, where we would look for signs of a top. Overall, we are bearish towards 105.20 and then 100.75.

GBPUSD:  A move below our initial downside targets in the 1.4390 area would signal further weakness. Our next targets are towards 1.4300.

USDCHF:  We are bullish. The move above resistance near 0.9725 signals further upside scope towards the 0.9800 range highs.

EURJPY:  We are neutral. A small basing candle on Friday signals short-term upside towards the 123.55 area. Overall, we prefer to fade upticks while the greater range highs near 126.50 caps. Our downside targets are towards 119.90, near the monthly cloud base and then 118.75/115.35.

EURGBP:  We are neutral. Lack of follow through following Thursday’s bearish engulfing candle keeps us sidelined for now. A break either side of the 0.7950/0.7860 would help to provide short-term direction.

EURCHF:  Friday’s rally encourages our bullish view. Our nearby targets area in the 1.1115 area. Beyond there, we are looking towards the 1.1200 range highs.

AUDUSD:  We have turned neutral having reached our initial targets near 0.7330 and expect a period of consolidation. A break below 0.7330 on increased investor volumes would encourage us to re-instate our bearish view towards 0.7210 next.

NZDUSD:  No change. We are bearish against the 0.7055 range highs. A break below nearby support in the 0.6805 area would confirm a top under 0.7055 and open targets near initial targets near 0.6760. Measured targets for the top are towards 0.6665 and then 0.6545.

USDCAD:  We are cautiously bearish USDCAD following a weekly key reversal candle. For now, we prefer to fade upticks against the 1.2995 range highs and look for a move back in range towards the 1.2460 lows. A break above 1.2995 however, would force us to abandon our bearish short-term view in expectation of a stronger upside correction.


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Credit Suisse FX Strategist: Moment of truth?

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Credit Suisse FX Strategist

Credit Suisse FX Strategist research: Moment of truth?

Exactly what the Chinese government’s objective for the CNY exchange rate is remains uncertain, in our view. However, the pace and consistency of the CNY’s depreciation vs. its basket and on a real exchange rate basis lead us to think depreciation, not stability, is the objective.

CNY depreciation has been easy so far thanks to USD weakness. However, if US data drive a further broad USD recovery, China will have to choose between stability vs. the CNY basket or stability vs. the USD. We think China would focus on the basket and move USDCNY higher.

This leads us to think about two trading scenarios following US payrolls data today:

■ Strong payrolls, stronger USD scenario: We think long USDHKD 1y, long USDKRW, and short the SGD vs. its basket would be attractive plays on a USD rally that pushes USDCNY higher.

■ Weak payrolls, weaker USD scenario: Short the CNY vs. its basket would be attractive in this scenario, in our view.

We don’t like saying we don’t know, but the fact is that we are still uncertain what the Chinese government’s objective for its currency really is.  However, if the USD rally continues, China will be forced to reveal its hand.

The People’s Bank of China’s (PBoC) recent management of the CNY leads us to believe its objective is depreciation of the CNY on a basket basis, particularly in real exchange rate terms.  The CNY has fallen more vs. its basket than we have expected, leaving USDCNY higher than our three month forecast of 6.43. We think this tends to reinforce our outlook for USDCNY to rise to 6.65 in 12m given our forecasts for the USD to recover against most currencies in the second half of this year.

In the near term, if US payrolls data lead this broad USD rally to emerge sooner than we expect, stress around the CNY will probably rise over the next month or so. In contrast, if US data resume USD weakness, it would allow for a more benign scenario of continued drift in USDCNY and CNY depreciation vs. its basket.

Looking across the various measures of the CNY exchange rate, our bias is to think that China is depreciating its currency, not keeping it stable. Figure 1 shows that the CNY clearly has been trending lower vs. the CFETS basket. The CNY has fallen 4.3% YTD vs. the CFETS basket, an annualized rate of depreciation of 12%. It has fallen through the 98 and 97 levels that many in the market expected to be the floor for the index if the policy objective is trend stability for the nominal trade-weighted rate.

Additionally, the extent of this nominal depreciation leads us to estimate that the CNY has fallen to its lowest level since last December on a real exchange rate basis even after accounting for the recent modest rise in Chinese CPI inflation (Figure 2).


However, three factors create uncertainty:

1. For all of the talk of a new FX regime, USDCNY is essentially flat year-to-date.

2. Volatility of the USDCNY fix has tended to be lower than volatility of the CFETS basket until very recently (Figures 3 and 4). However, if the government were managing on a basket basis with an objective being stability in the trend in the basket, vol of the basket should be lower than vol of spot. To be sure, in Singapore, 3m spot vol is about 7.8% whereas SGD basket vol is only 3.2%. Admittedly, CNY spot vol has risen, so maybe things are changing. Perhaps the recent rise in fix vol and fall in basket vol indicates that the government has transitioned to targeting the basket, not the fix.  But the vol differences are still low enough and new enough to lead us to be uncertain.


3. China’s government seems keen to avoid large capital outflows driven by concern about CNY depreciation. We think this requires a stable or stronger CNY vs. the USD, not stability in the CNY vs. its basket.  Figure 5 shows that our estimate of corporate hoarding of foreign exchange, i.e. the difference between actual net FX settlement as reported by SAFE and the reported trade balance, tends to rise sharply when USDCNY rises, but moderate or reverse when USDCNY is stable or lower. We estimate these flows accounted for about 40% of outflows last year.


Summing up, we see two main scenarios following payrolls.

USD rally: If the US data drive a USD rally China will have to choose between spot stability at a cost of CNY reversal stronger vs. its basket or sustaining the CNY’s depreciation vs. its basket at a cost of a rise in USDCNY. The risk here is of a resumption of a USD appreciation trend back to its 2015 highs, not just a small or temporary bounce.

Perhaps the PBoC has been depreciating the CNY vs. its basket during the recent period of broad USD weakness specifically to create room for the CNY to reappreciate vs. the basket in the event of a USD recovery. This would allow it to keep USDCNY stable, at least in the early stages of any broad USD rally.

However, we tend to doubt this explanation.  One reason is that it would invalidate the whole concept of managing the CNY vs. a basket that the government has been advocating. Another is that if the USD TWI exceeded its past highs, China would have to accept CNY appreciation to new highs.

In contrast, we think the most likely scenario would be that the PBoC would push USDCNY higher in order to try to prevent the CNY from appreciating vs. its basket. In this scenario, we estimate roughly that if the DXY were to return to its November 2015 high, USDCNY would need to rise to about 6.86 to prevent appreciation on a basket basis. That’s for CNY stability vs. its basket. If the objective is further depreciation vs. the basket or on an REER basis, USDCNY would have to rise more sharply.

USD weaker: Goldilocks continues. A stable or weaker USD-G10 would likely lead China to keep USDCNY stable or slightly lower in order to continue trend depreciation vs. its basket.

How to trade this?

USD rally scenario:

A USD rally scenario would be most disruptive for markets, in our view. Yet market pricing of risk has CNY risk moderating slightly. Implied volatility has crept lower while implied to delivered ratios have been roughly stable and the 6m/1y vol curve has steepened. Vol adjusted risk reversals have also been stable as vol levels have fallen.

We think the best ways to position for CNY stress generated by a stronger USD are in proxies for the CNY, not the CNY or CNH itself. Specifically, we prefer:

■ Long USDHKD 1y forward points. We expect the peg to hold, but if USDCNY rises significantly we believe the HKD forward points are likely to rise back to 400 – 500 as they did in January and February vs. the current roughly 83.

■ Long USDKRW. The KRW retains Asia’s highest beta both to risk appetite falls and stress in China. Additionally, seasonal factors tend to be particularly negative for KRW in May.

■ Short SGD vs. its basket.  We expect slowing growth and moderating inflation in Singapore should push the SGD 1.5 – 2.0% lower against its basket over the next couple of quarters even without CNY stress. A resumption of an uptrend in USDCNY would likely accelerate this move in the SGD, in our view.

USD weakness scenario:

In contrast, we believe the best way to trade the implications for the CNY of a resumption of broad USD weakness is by going short the CNY vs. its basket. We would expect the PBoC to continue pursuing CNY depreciation vs. the basket at roughly the recent pace if it can achieve this with a stable or slightly lower USDCNY. Crucially, the more that the CNY depreciates vs. its basket the more it will risk creating competitive stress for other EM currencies, in our view. Remember that China’s exports have retained or gained market share in all of its major markets bar Japan over the past year even with the CNY REER at a historical high.

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Nomura Research: What’s Correlating in FX

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Nomura Research

We have constructed a monitor that tracks 1,961 correlations across markets (see full monitor on second page). To strike the right balance between stability and relevance, we focus on three-month correlations of changes in market prices. It should help to gauge the relationships driving asset prices. More importantly, identifying significant changes in these correlations can provide an early indication of “regime changes.” Focusing on G10 FX in this report, we find the following:

■ The largest correlations are dominated by equities. For example, USD/JPY has a 72% correlation with the Nikkei and EUR/CAD has a -77% correlation with the FTSE 100 (i.e., EUR falls against CAD when UK equities rally). In general, the dollar appears to be positively correlated with risk, and so the euro is the funding currency that is negatively correlated with risk. This shows in euro crosses correlating with risk (see Figure 1).

■ Outside of risk, rate differentials are correlated to some currency pairs: EUR/GBP, EUR/NZD and EUR/CAD stand out. Again, it seems the euro is the base currency through which fundamentals are expressing themselves (see Figure 1).

■ As for changes in correlations, the biggest increases to more negative or more positive appear to involve oil. It seems that a whole swathe of currency pairs from EUR/NOK to EUR/USD to USD/CHF have become correlated to oil prices (see Figure 2).

Nomura Top G10 FX correlations

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Societe Generale FX Daily – The Fed’s in a pickle

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Societe Generale FX Daily

■  The odds of this week’s US FOMC meeting delivering a rate hike are zero, according to Bloomberg. The chances of a cut are higher, but only 2%. What matters is the tone of the statement but the Fed has painted itself into a corner. The odds of a June hike are now down at 20% and the FOMC can’t signal a move without triggering market turmoil. A neutral/dovish message may provide a modicum of short-term comfort to markets and hold down the dollar but wouldn’t solve the problem of how to prepare markets for further policy normalisation.

■  Meanwhile, CFTC data paint a now-familiar picture of speculative FX positioning: Longs are building in AUD, CAD, NZD and JPY. MXN and EUR shorts are dwindling away and only GBP shorts grew in the week to Tuesday. The sum of positions is net short USD for the first time since July 2014. The four months after that saw the dollar rally 20% in trade-weighted terms as dollar longs were built up. The current environment is very different of course, but anything which makes the markets price in a faster pace of rate hikes than the current one (1.5 hikes by the end of next year) would be bad for risk sentiment and good for the dollar.

■  The merest whisper of further BOJ action at Thursday’s meeting was enough to scare some of the yen longs (and revive interest in the Nikkei). Most likely is that the BOJ will borrow from the ECB playbook and lower the cost of some loans to banks, to help offset the effects of January’s move. That won’t have much significance, and it’s not surprising that the yen is a bit stronger this morning. However, I do think the CFTC data accurately reflect short-term market sentiment and as Japanese demand for foreign assets remains incredibly strong, we look for further yen weakness in the few weeks.

■  European news doesn’t look likely to be the driver of the Euro. Treasuries/Bunds are in a range, like the currency. Money supply data are due Wednesday and should be reasonably encouraging, while Q1 GDP data are due on Friday, showing annual growth slowing to 1.5% from 1.6% which is neither here nor there. The chances of a re-run of the Spanish elections in June seem high but that’s not really a new development either.

■  Bookmakers reacted to the intervention of President Obama in the UK’s EU referendum debate by lengthening the odds of a ‘leave’ vote. Politically-inspired sterling shorts are being squeezed as a result, but the news that a major High Street retailer is in danger of administration is a reminder of headwinds facing the economy. Q1 GDP is likely to come in a 0.4% q/q, steady at 2.1% y/.y but definitely on a slowing trajectory. The scale of sterling short-covering is best seen in EUR/GBP, which looks overdone under 0.78. We’ll stick with short GBP/NOK as the best way of reflecting twin views about oil (cautiously positive) and the UK economy (gloomy).

■  Other ways to express views: Short EUR/RUB remains attractive. Jason still like shorts in SGD/INR. There’s about more to take out of shorts in USD/CAD and AUD/NZD longs are still performing, while we still like shorts in CHF/SEK. But the time is coming, with a growing focus on China’s debt problems and a market that has fully embraced the Fed’s dovishness, to figure out how to get outright long the US dollar again.

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Morgan Stanley FX Morning – April 11

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Morgan Stanley FX Morning


Why JPY has further upside: We expect further flows from various market participants to continue to support JPY. First, Friday’s reluctance for JPY to weaken (indicating de-risking ahead of the weekend) suggests that ‘the Street’ has not traded JPY long in significant amounts last week. Note that CFTC data showed the most net long positions building in the first four weeks of the year. Instead our client conversations focusing on the BoJ and its ability to weaken JPY are suggesting to us that the market has not fully adopted our view, suggesting JPY strength staying with us for even longer. Second, Japan’s retail accounts may still need to wind down their JPY-funded carry trades, suggesting more of this ‘P&L’ driven JPY buying in store. Third, pension funds and financial institutions’ foreign assets relative to total assets are near historical highs and most importantly still hugely currency-unhedged. The GPIF had allocated 36% of its portfolio to foreign assets at the end of December 2015.

The BoJ’s ability to weaken JPY remains limited, as we highlighted on Friday. Sovereign bond purchase-focused QE can no longer rely on the JGB yield curve acting as a transmission mechanism. Negative interest rates seem to undermine banks and monetary velocity, hence strengthening and not weakening JPY. The BoJ’s tool box appears to be limited to the purchase of private assets such as ETFs. The JPY-weakening impact of such BoJ equity purchases should be limited. The mechanism of JPY weakness in this scenario would be limited to the de-FX-hedging of equity portfolios, where many global equity investors have used JPY as a ‘quasi’ hedge for equity risk. Alternatively, the focus on increasing fiscal spending would require equity market investors to have more faith that Abenomics is going to work in order for JPY to weaken significantly. Bloomberg is reporting that foreign traders have sold Japanese equities for 13 straight weeks, the longest stretch since 1998. This ‘outflow’ from Japan has not weakened JPY as it has been met with a larger inflow from domestic investors.

The likelihood JPY resumes its appreciation is high, but the higher JPY moves, the bigger are the carry trade liquidation pressures. Here we under line our thoughts again. The second-round effects of JPY strength would terminate the US D downward correction, especially against liquid high-yielding currencies with the EM spectrum. Within the DM world it might be AUD suffering most. China’ s CPI remaining steady at 2. 3%Y puts focus on this this week’s trade and GDP data. China’s 1Q GDP will be released on Friday, with a high likelihood of seeing a positive surprise. The Chinese economy seems to be under going a cyclical rebound, while structural issues such as over capacity, low debt and investment multipliers have not been addressed yet. The question is how much of the good cyclical news has been priced in. Should AUD fail to rally following the anticipated strong 1Q GDP report then AUDUSD should have traded its corrective top to near 0. 7730. Within our strategic portfolio we sell AUDUSD near 0. 7650 and we recommend selling AUDNOK as our ‘trade of the week’.

The Fed-JPY link: We put special focus on AUDJPY, which offer s significant downside potential from here should JPY-based investors pile out of carry trades. Another interesting factor driving AUDJPY down comes via the Fed and risk appetite. USDJPY-bearish performance may remind Fed Chair Yellen that there aren’t just winners from a lower USD. Abenomics and the ECB’s Draghi’s “Whatever it takes” approach are the losers. Sure, lower inventories, negative net trade and the weak US manufacturing sector have pushed the Atlanta Fed ‘Nowcast’ GDP indicator to 0. 1%, but this week’s release of March retail sales should provide a timely reminder that US domestic demand conditions have remained growth-supportive. Markets currently under price our call for the Fed hiking rates in December. In addition, 1Q earnings will start to be released in the US today. Actual releases tend to surprise under whelming expectations. Market projections are for an aggregate 6. 9%Y decline of S&P500 listed company profits. Should positive surprises disappoint relative to previous quarters then risk appetite may get hit. If not, it might be rising rate expectations that limit the equity mar ket upside anyway. Whatever the outcome, AUDJPY should receive little support from the risk appetite side of matters.

EURGBP’ s next target is 0.85: The press is reporting that the ‘Save Dave’ political reaction to the release of the ‘Panama papers’ may suggest promoting Justice Secretary Gove to Deputy Prime Minister and allocating a prominent cabinet post to Boris Johnson after the referendum. Some may say this is part of the plan to bring the Conservative party back together but for FX trading it suggests two leading figures of the Brexit campaign increasing their political relevance ahead of the June 23 vote, increasing volatility in GBP. The economic fundamentals are not looking good either with the 7% current account deficit, the 4% budget gap and the UK household sector reporting a 2. 3% decline of its net savings in 4Q, leaving us firmly within the sterling bearish camp. Our favoured way to play this week is to be long EURGBP.

Trades of the week:

G10 – Sell AUDNOK

Our structural bearish view on AUD, based on weak nominal growth, a poor terms of trade outlook and a slowing housing market, is likely to lead to 50bp of cuts by the RBA by year-end. We propose selling AUDUSD on rallies but prefer to sell AUDNOK today. NOK has been fairly shielded during the ups and downs in the oil price recently because of the sovereign wealth fund, and the ability for the government to ramp up fiscal spending if needed may limit the negative impact on the economy relative to other commodity producers.

Despite AUD depreciation over the last few years, Australia’s nominal trade deficit and current account remain near post-crisis wides. China’s rebalancing away from investment, particularly the steel capacity cuts announced in recent months, as well as the excess real estate inventory in Tier 3 cities pose large downside risks to iron ore prices. Furthermore, domestic demand has mainly been supported by the housing boom, which we expect to reverse. With the RBA’s inclusion of negative language on AUD in the most recent statement, we believe that too strong an AUD rally from here increases risks of an RBA cut in the near term, and we expect weaker data in the future. Both would support the trade.

The main risk for the NOK side this week is the lead-up to the OPEC meeting on April 17, with the probability of an agreement to cut production looking low for now. NOK’s correlation with oil is much lower than that of CAD.

We like to sell AUDNOK at market with a target of 6.0800 and a stop at 6.2950.


Evidence suggests that positioning in the Turkish lira has built up meaningfully since the rally in EM currencies started in late January. Lower oil prices, stronger-than-expected growth in 4Q15, which was further emphasised in last week’s better-than-expected IP data, and lower inflation have all contributed to a stronger fundamental footing for Turkish assets recently. One concern is the considerable uncertainty over monetary policy in light of the upcoming appointment of the central bank governor , which could come as soon as this week. The presidency of Turkey does not hide the fact that it would like to see interest rate cuts, and it’s quite likely that TRY will weaken a little ahead of the announcement, but we will only really know the stance of monetary policy once the new governor concludes the first meeting on April 20.

The main risk to the trade would be for the CBT’s initial communications to sound purposefully conservative, given the above considerations, as has been the case in Poland following changes to the MPC earlier in the year. Today will see February current account data released, and the expectation is for just over a US $2.2 billion deficit.

We like to buy EURTRY at market with a target of 3.35 and stop of 3.20.


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Credit Suisse FX Daily Technical Analysis

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Credit Suisse FX Daily

Today’s highlights:
■ NZDUSD has completed a large “bearish” outside reversal, turning the immediate risk lower for .6565/45.
■ AUDUSD has rallied further, with a clear break above .7490/.7533 needed to reinforce the base for .7739 next.
■ EURUSD above 1.1047/68 is needed to resolve the sideways range higher to establish a better base.
■ EURJPY ideally finds fresh selling on a challenge of trendline and price resistance at 125.48/97.
■ USDJPY is expected to find fresh selling on a test of price and trendline resistance at 114.28/29.
■ USDCAD’s bearish “outside” day keeps the focus lower for price support at 1.3225 next.
■ GBPUSD focus remains on trendline resistance and the 61.8% retracement barrier at 1.4296/351.
■ EURGBP below .7691 is needed to resolve the range lower for .7661.

Today’s trades/positions:
■ EURUSD: Long at 1.0960, stop below 1.0903 for 1.1165.
■ USDJPY: Short at 115.20, stop above 117.54 for 110.10/00.
■ GBPUSD: Flat, sell at 1.4350/51, stop above 1.4419 for 1.3840.
■ USDCHF: Short on the break below .9945, stop above 1.0039 for .9775.
■ AUDUSD: Long at .7400, stop below .7280 for .7730.
■ NZDUSD: Flat. Sell again at .6670, stop above .6720 for .6565/45.
■ USDCAD: Reversed short, stop above 1.3472 for 1.3040.
■ EURJPY: Short at 124.95, stop above 126.00 for 122.10.
■ EURGBP: Short at .7750, stop above .7830 for .7570.

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BNP Paribas research – FX Daily Strategist Feb 12

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BNP Paribas Research


Significant change to Fed forecasts to impact USD direction

Financial  markets  remain  in  the  grip  of  severe  risk  aversion  and  against  this  backdrop  current  account  surplus-backed currencies continue to extend gains while receding Fed expectations undercut the USD generally.  The US money market curve is flirting with pricing risk of policy easing, a possibility the Fed Chair did no t dismiss outright in her Senate testimony even if she continued to emphasize it is not her expectation. In response to the tightening of financial conditions we have observed over  the past month, our economists have made significant changes to their Fed forecasts and now no longer expect the Fed to hike rates in 2016 or 2017  (see  here).  Essentially, we expect the fragile risk environment to preclude tightening in H1 and slowing activity to argue against further rate hikes thereafter. The shift in Fed expectations cle arly has big implications for the dollar  outlook  and  we  are  currently  reviewing  our  USD  forecasts  accordingly.  For  now,  the  funding  currencies  are  likely  to remain well supported and the USD on the defensive, though markets will remain wary of action and com ments from other G10 officials, particularly in Japan where verbal warnings are possible as officials return from Thursday’s holiday.

Soft Q4 GDP growth in Europe adds to pressure on ECB

We expect the first estimate of eurozone GDP to show growth of 0.2% q/q in Q4, with the corresponding number for Italy also at 0.2% q/q and Germany a little weaker at 0.1% q/q. With ECB already in full QE mode, eurozone data has typically had little market  impact  lately,  but  given  concerns  over  a  major  global  growth  slowdown,  markets  should  me  more  sensitive  to  this release.  Current  market  conditions  in  the  asset  markets  imply  that  the  EUR  should  continue  drawing  support  from  its  large current  account  surplus.  However,  we  continue  to  see  limits  to  EURUSD  appreciation.  Should  EURUSD  rally  through  1.15, levels last seen before the dovish ECB shift in October, ECB will be more likely to respond quite aggressively to the undesir able tightening in financial conditions at its March policy meeting.

Commodity currencies could follow USD lower

The CAD and AUD have held up better than might be expected this week, holding stable against a broadly weaker USD despite continued weakness in crude prices. We see scope for these currencies to  depreciate  in the weeks ahead, even vs. the USD. Both  are  current  account  deficit  economies  reliant  on  financial  inflows  and  both  are  exposed  to  continued  weakness  in commodity  prices.  While  the  broad  USD  retreat  may  have  reduced  the  risks  of  further  CNY  devaluation  for  now,  the  AUD remains exposed to negative news from China and further pressure on industrial metals prices. There is also scope for markets to increase pricing for RBA and  BoC  easing.  RBA Governor Stevens’  testimony to parliament yielded few surprises,  where he maintained an easing bias but also continued to sound relatively optimistic about the domestic outlook.


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Credit Suisse research – A top for Japan confirmed

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Credit Suisse Research


USDJPY finally confirms a medium-term top

As we have already highlighted on a couple of occasions this year (A major top for  Japan,  20th January),  we  have  been  bears  of  Japan,  looking  for  conclusive reversals of the bull trends in USDJPY and the Nikkei/TOPIX.  The brief spike post  the  BOJ  has  been  aggressively  reversed,  and  for  USDJPY,  the  longlooked for top below 116.15 has in our view finally been confirmed. We  thus  stay  bearish  and  look  for  further  weakness  to  113.99/85  next,  ahead of  support  from  a  rare  price  gap  from  October/November  2014  at  112.56/33. This  should  be  allowed  to  hold  at  first,  ahead  of  the  sell-off  extending  to 110.09/00  –  the  September  2014  high  and  psychological  support.  Bigger picture,  we  target  106.65/60  –  not  only  the  measured  target  from  the  top,  but also the 38.2% retracement of the entire 2011/2015 bull market. Resistance  shows  at  115.85/86  initially,  then  116.15/30,  with  117.54  needing to cap to keep the immediate risk bearish.

For  GBPJPY,  the  recovery  in  late  January  was  capped  by  a  cluster  of  resistances  at 174.87/176.18  –  the  38.2%  retracement  of  the  2015/2016  collapse,  April  2015  low  and falling  13-week  average  –  and  the  subsequent  rejection  from  here  maintains  a  large  top. Key  support  is  seen  from  the  January  2016  and  2014  lows  at  163.99/88,  below  which should  act  as  the  catalyst  for  a  resumption  of  the  downtrend  to  160.02/00,  ahead  of  the 50% retracement of the 2011/2015 bull market at 156.37.

For  EURJPY,  the  stronger  EUR  is  keeping  the  cross,  for  now  at  least,  well  supported above pivotal price and “neckline” support at 126.18/09.  Although a large topping threat is present,  only  below  126.09  would  see  this  confirmed,  turning  the  outlook  bearish  for 124.97 initially, then 121.95.

When  looking  at  the  JPY  in  Trade  Weighted  terms,  a  base  was  completed  at  the beginning  of  the  year.  The  BOJ  spike  was  contained  well  above  the  uptrend  from  June 2015,  and  the  subsequent  strong  rally  maintains  the  base.  We  thus  stay  bullish  and  look for  further  broad-based  JPY  strength.  Given  the  still  strong  relationship  between  the currency and equity markets, this is expected to keep equities under pressure.

For  the  Nikkei,  the  post  BOJ  bounce  has  also  been  quickly  reversed,  leaving  the  market retesting  its  recent  low  and  38.2%  retracement  of  2011/15  rally  at  16055/15.  Below  here, which  we  look  for,  should  confirm  a  medium-term  top  is  in  place,  for  a  decline  to  the  50% retracement  and  price  support  at  14545/30,  then  13885,  the  low  of  2014.  The  measured target from the top though is seen set lower at 12920.

The TOPIX though is already below its 38.2% retracement of the 2012/2015 bull market at 1317, and with a medium-term top already in place, we stay bullish and look for weakness to extend to our 1197/77 next target – the 50% retracement and late 2014 low.

Go  short  USDJPY  at  116.30/117.30,  place  the  stop  above  118.30.  Take  profit  at 106.75.

Go  short  Nikkei  at  17000/17200,  stop  above  17950.  Also  add  below  16000.  Take profit at 13200.


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Commerzbank research – How much upside potential does EUR-USD have?

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Commerzbank Research


How much upside potential does EUR-USD have?

EUR-USD is trading above 1.13  –  a  consequence of general USD weakness after the market’s re-assessment of the Fed expectations. Such levels, however, could prove to be unsustainable. The ECB policy will i.a. be influenced by the EUR exchange rates. The risk of a significantly more expansionary ECB policy is not properly reflected in the FX market.

For a long time the ECB was known as a central bank which was able to over-deliver compared to market expectations. This impression was destroyed by the December meeting. In December  the  ECB  significantly  disappointed  market  expectations  of  a  “strong” move,  by only delivering a small rate cut. And indeed: ECB President Mario Draghi’s old strategy – to create market expectations, which put the other Council members under pressure to deliver – failed spectacularly in December. That, however, does not imply that the ECB will always and forever be a paper tiger. Even under the assumption that Draghi did not find a sufficiently  large  majority  for  strong  measures  in  December  (which  would have  pushed  EUR-USD down),  we must concede: under different circumstances those who had opposed stronger measures in December might have behaved differently. And the relevant aspects of “circumstances”include the EUR exchange rates.

Yes,  of  course,  the  ECB  officials  will continue  to  formally  stick to  the  G7  London  accord, which implies that central banks refrain from manipulating exchange rates. This is the reason for Draghi’s regular statement that exchange rates would not be a policy target for the ECB.  Inside  the  London-accord  frame,  however,  the  ECB  does  everything  to  create  the impression that it would prefer lower EUR exchange rates. No wonder, as the exchange rate channel is the last one still functioning nearly normally. The ECB has all reasons to be concerned  regarding  inflation.  And  therefore  it cannot  afford to  accept  higher  EUR  exchange rates.  Elevated  EUR-USD  exchange  rates  therefore  increase  the  probability  of  stronger-than-expected ECB measures in March  – and therefore of a significant correction in EURUSD. The FX market is largely ignoring this risk. EUR-USD risk reversals trade at elevated levels. In fact only some days ago they printed in positive territory  –  a  situation we haven’t seen since mid-2009 (figure 1). The market obviously regards the risk of sharp down moves in EUR-USD as small.

In their central scenario our ECB watchers still assume that the ECB will indeed only deliver another small (10bps) rate cut in  March. This would certainly not create significant downward pressure on EUR-USD or other EUR exchange rates. This scenario still is possible.  But it is based on the assumptions that (a) financial markets calm down again and (b) EUR-USD  trades  at lower  levels  than  currently.  The  fact  that EUR-USD  can  gain in  phases of weak stock markets can only be explained by the market’s assumption that the ECB would hardly  react  on  negative  circumstances.  This  assumption  is  brave.  Every  day  of  financial market turbulence and every pip of higher EUR-USD quotes increases the probability of a more aggressive ECB.

For the medium-term (i.e. after March 10th) I see good chances for EUR-USD  –short positions. And I expect lower EUR-USD riskies again.


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