FX Daily Strategist: Europe

Although the selling pressure on the dollar has eased somewhat, the DXY extended its decline to a new multi-month low. The market sentiment is that, until US data suggests the contrary, the timeline for Fed QE tapering is being pushed back into 2014, which is a negative for the USD. However, with most investors still on the sidelines at levels of exposure still below seasonal averages we are sceptical of the weak USD view at this juncture. First, USD longs have already been cleared out; in fact for some of the core G10 currencies such as EUR and GBP markets already hold substantial long positions. Second, in relative terms the Fed is still likely to be less dovish than the other major central banks as it eventually heads towards policy exit. In contrast, the BoJ remains in a firm policy easing mode, and further ECB stimulus is also a distinct possibility. Third, we do expect the US economy to accelerate to 2.2% q/q annualized pace in Q4, which implies that US data surprises should be biased to the upside. The key focus of this week’s ‘catch up’ schedule for US data is the September nonfarm payrolls report on Tuesday, where we expect a headline gain of 170k. Today we see September existing home sales falling by 3.3% m/m.