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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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