US Morning Update - Easy Forex News

Major Overnight Headlines

• Chinese Q3 GDP grows 7.8% YoY, matching expectations; Sept. retail sales & IP generally in-line

Interestingly, the CHF was the best performing G10 currency versus the USD in spot terms from the beginning of the ‘no taper’ in September, straight through to the beginning of this week when things really came down to the wire in Washington. Afterwards, the AUD and the NZD began to overtake the CHF. We still prefer the latter as the ‘long trade’ to own in this environment mainly because we think it’s a better play overall in an inherently unsettled and uncertain world. However, we are at the same time beginning to suspect that the AUD and the NZD are seeing their demand rise.

There may indeed be a play developing here based on China’s future appetite for US Treasuries, and we certainly think it’s worth a punt. However, we would also suggest that the most aggressive CNY bulls or aggressive USD bears avoid getting too carried away with this theme beyond this week or the next. On the one hand, central banks, corporates and financial institutions will all very much need to continue holding some USD paper – for a long time to come. Value sniffing will eventually return in the USD again. On the other hand, in terms of developing market central bank flows, keep in mind that we are talking about some of the savviest and most sophisticated reserve managers in the world here. Therefore, we need to balance our views on the current situation in US politics with the knowledge that many reserve managers would have already been actively reducing their dependence on the USD for reserve purposes in the run-up to the events of this week – but not necessarily in their aftermath. None of these market participants, in our opinion, were for the last 5 years or so going to let the high probability of these events in Washington occurring take them completely by surprise. In other words, they could have seen it coming from miles away. Additionally, we would expect the RBA and the PBoC to ‘act rapidly’ if things got out of hand.

Finally, in the run-up to the late US data we’re receiving from next week, we’re going to be lightening the load a little bit in terms of our general USD shorts. This is due primarily to the wide gap which is forming between the apparent level of USD bearishness and the possibility that the eventual Yellen-led Fed stance towards QE tapering or policy in general is initially a bit less ‘flagrantly dovish’ than the current consensus participants seem to be running with. Be careful.

Read the full report: FX Daily

BMO