After the impulsive run, the USD (DXY) will likely retreat at least to 81.50; inflation data this weak – a lower CPI print helpful to EUR; long commodity FX – even CAD could benefit short term
The summary of the main Jackson Hole speeches? Yellen: looks good, but… Draghi: looks not so good, but…Now inflation and wages are in their focus, and it seems there is a growing worry among Fed that it could pop up sooner / faster rather than later / slower – (as Yellen put it, “pent-up wage deflation”)… But the market isn’t buying it just yet. The Market is always right?
Higher inflation in the US vs lower in the EMU, ceteris paribus, is EURUSD positive. That’s this week’s key data, all on Friday: the EMU headline inflation expected to print at new lows, 0.3% y/y (oil!)…though core should stabilize; and the US PCE (Fed favourite) to remain unchanged at 1.6% y/y. Notably, the spot EURUSD market has followed the nominal short rates spread since June, which has not been the case with the options market, where the EURUSD risk reversals have kept up – and even moved up relative to June levels! Who is right?
Figure 1. Real rates spread still at June levels
Figure 2. …Options market following real terms
In the UK, the wage inflation is even more muted, but many housing indicators flash financial stability concerns. Last week’s surprising BoE minutes are no game changer – after all, Weale and McCafferty are well known hawks. Remember the calls to hike back in 2011? It is premature to expect a hike in November, as some already do, if BoE minutes is anything to go by (evidence needed). But the long GBP positioning vs USD have been squared… I would rather be long GBP than USD here and now, and keep the GBP short against the EUR.
Figure 3. Too cheap not to buy
The USD index (DXY) is near the important resistance level, where the momentum is fading, short right away at least to correct the overshooting, toward 81.40/50. Positive on commodity FX and EM broadly, tactically…yes, even RUB.
Figure 4. Retreat mode
The USDSEK and USDCAD shorts are most appealing tactically (both double tops). The USDJPY broke up, but likely to fail at these levels (April highs) as inflation is to taper, just as the USDCHF to retreat from January highs. Elsewhere, I would take profit on part of the AUDNZD long trade (one of the trades of 2014) as the upper range level is reached, even tactical short below 1.1060…but still believe in the trade with a multi-month horizon.
Nordea