Major Overnight Headlines
Norwegian underlying CPI rises 1.9% YoY in October, versus 1.8% rise expected
Italian industrial output falls 3.0% YoY in September, roughly in-line with expectations
Australian home loans rise 4.4% MoM, near the 4.8% MoM max rise since 2009 (-4.0% previously)
Japanese current account deficit at 125bln in September, widest since at least 1985
In view of the general bid tone in the USD versus the GBP and the JPY this morning in London, the tendency of EURUSD to grind higher suggests that the bulk of the move was related to positioning, and the subsequent covering of EUR shorts following last week’s ECB rate cut. Still, the tendency of the EUR to grind higher so far today is rather curious, in light of last week’s events. We’ll have more food for thought in this regard as the week progresses.
In the run-up to Yellen later in the week, we suspect that there is some additional headroom in EURUSD, but also that rallies should remain capped well in advance of the 1.3500 mark.
We don’t doubt that FX has jumped back on to the ‘taper’ story following the October FOMC. The general downtrend in AUDUSD and the corresponding weakness in some of the key currencies correlated with the ‘QE trade’ (NOK, SEK, ZAR) serves as evidence. Nevertheless, we would argue that FX still lacks the required confidence to take the USD another leg higher at this stage, particularly in light of the aggressive swing in USD sentiment and price action over the summer months. Yellen will therefore be an important signalling factor this week, and we expect general turnover to move a bit higher between Wednesday and Friday. If neither Yellen nor the economic data conjure up support for the aforementioned ‘swing’ higher in the USD before year-end flows really commence, the 25bps rate cut from the ECB will mean very little for the EUR. There are but two, maybe three weeks at most before FX ‘calls it a year’.
Read the full report: FX Daily
BMO