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BNP Paribas research – FX Daily Strategist Feb 12

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BNP Paribas Research


Significant change to Fed forecasts to impact USD direction

Financial  markets  remain  in  the  grip  of  severe  risk  aversion  and  against  this  backdrop  current  account  surplus-backed currencies continue to extend gains while receding Fed expectations undercut the USD generally.  The US money market curve is flirting with pricing risk of policy easing, a possibility the Fed Chair did no t dismiss outright in her Senate testimony even if she continued to emphasize it is not her expectation. In response to the tightening of financial conditions we have observed over  the past month, our economists have made significant changes to their Fed forecasts and now no longer expect the Fed to hike rates in 2016 or 2017  (see  here).  Essentially, we expect the fragile risk environment to preclude tightening in H1 and slowing activity to argue against further rate hikes thereafter. The shift in Fed expectations cle arly has big implications for the dollar  outlook  and  we  are  currently  reviewing  our  USD  forecasts  accordingly.  For  now,  the  funding  currencies  are  likely  to remain well supported and the USD on the defensive, though markets will remain wary of action and com ments from other G10 officials, particularly in Japan where verbal warnings are possible as officials return from Thursday’s holiday.

Soft Q4 GDP growth in Europe adds to pressure on ECB

We expect the first estimate of eurozone GDP to show growth of 0.2% q/q in Q4, with the corresponding number for Italy also at 0.2% q/q and Germany a little weaker at 0.1% q/q. With ECB already in full QE mode, eurozone data has typically had little market  impact  lately,  but  given  concerns  over  a  major  global  growth  slowdown,  markets  should  me  more  sensitive  to  this release.  Current  market  conditions  in  the  asset  markets  imply  that  the  EUR  should  continue  drawing  support  from  its  large current  account  surplus.  However,  we  continue  to  see  limits  to  EURUSD  appreciation.  Should  EURUSD  rally  through  1.15, levels last seen before the dovish ECB shift in October, ECB will be more likely to respond quite aggressively to the undesir able tightening in financial conditions at its March policy meeting.

Commodity currencies could follow USD lower

The CAD and AUD have held up better than might be expected this week, holding stable against a broadly weaker USD despite continued weakness in crude prices. We see scope for these currencies to  depreciate  in the weeks ahead, even vs. the USD. Both  are  current  account  deficit  economies  reliant  on  financial  inflows  and  both  are  exposed  to  continued  weakness  in commodity  prices.  While  the  broad  USD  retreat  may  have  reduced  the  risks  of  further  CNY  devaluation  for  now,  the  AUD remains exposed to negative news from China and further pressure on industrial metals prices. There is also scope for markets to increase pricing for RBA and  BoC  easing.  RBA Governor Stevens’  testimony to parliament yielded few surprises,  where he maintained an easing bias but also continued to sound relatively optimistic about the domestic outlook.


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Credit Suisse research – A top for Japan confirmed

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Credit Suisse Research


USDJPY finally confirms a medium-term top

As we have already highlighted on a couple of occasions this year (A major top for  Japan,  20th January),  we  have  been  bears  of  Japan,  looking  for  conclusive reversals of the bull trends in USDJPY and the Nikkei/TOPIX.  The brief spike post  the  BOJ  has  been  aggressively  reversed,  and  for  USDJPY,  the  longlooked for top below 116.15 has in our view finally been confirmed. We  thus  stay  bearish  and  look  for  further  weakness  to  113.99/85  next,  ahead of  support  from  a  rare  price  gap  from  October/November  2014  at  112.56/33. This  should  be  allowed  to  hold  at  first,  ahead  of  the  sell-off  extending  to 110.09/00  –  the  September  2014  high  and  psychological  support.  Bigger picture,  we  target  106.65/60  –  not  only  the  measured  target  from  the  top,  but also the 38.2% retracement of the entire 2011/2015 bull market. Resistance  shows  at  115.85/86  initially,  then  116.15/30,  with  117.54  needing to cap to keep the immediate risk bearish.

For  GBPJPY,  the  recovery  in  late  January  was  capped  by  a  cluster  of  resistances  at 174.87/176.18  –  the  38.2%  retracement  of  the  2015/2016  collapse,  April  2015  low  and falling  13-week  average  –  and  the  subsequent  rejection  from  here  maintains  a  large  top. Key  support  is  seen  from  the  January  2016  and  2014  lows  at  163.99/88,  below  which should  act  as  the  catalyst  for  a  resumption  of  the  downtrend  to  160.02/00,  ahead  of  the 50% retracement of the 2011/2015 bull market at 156.37.

For  EURJPY,  the  stronger  EUR  is  keeping  the  cross,  for  now  at  least,  well  supported above pivotal price and “neckline” support at 126.18/09.  Although a large topping threat is present,  only  below  126.09  would  see  this  confirmed,  turning  the  outlook  bearish  for 124.97 initially, then 121.95.

When  looking  at  the  JPY  in  Trade  Weighted  terms,  a  base  was  completed  at  the beginning  of  the  year.  The  BOJ  spike  was  contained  well  above  the  uptrend  from  June 2015,  and  the  subsequent  strong  rally  maintains  the  base.  We  thus  stay  bullish  and  look for  further  broad-based  JPY  strength.  Given  the  still  strong  relationship  between  the currency and equity markets, this is expected to keep equities under pressure.

For  the  Nikkei,  the  post  BOJ  bounce  has  also  been  quickly  reversed,  leaving  the  market retesting  its  recent  low  and  38.2%  retracement  of  2011/15  rally  at  16055/15.  Below  here, which  we  look  for,  should  confirm  a  medium-term  top  is  in  place,  for  a  decline  to  the  50% retracement  and  price  support  at  14545/30,  then  13885,  the  low  of  2014.  The  measured target from the top though is seen set lower at 12920.

The TOPIX though is already below its 38.2% retracement of the 2012/2015 bull market at 1317, and with a medium-term top already in place, we stay bullish and look for weakness to extend to our 1197/77 next target – the 50% retracement and late 2014 low.

Go  short  USDJPY  at  116.30/117.30,  place  the  stop  above  118.30.  Take  profit  at 106.75.

Go  short  Nikkei  at  17000/17200,  stop  above  17950.  Also  add  below  16000.  Take profit at 13200.


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Commerzbank research – How much upside potential does EUR-USD have?

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Commerzbank Research


How much upside potential does EUR-USD have?

EUR-USD is trading above 1.13  –  a  consequence of general USD weakness after the market’s re-assessment of the Fed expectations. Such levels, however, could prove to be unsustainable. The ECB policy will i.a. be influenced by the EUR exchange rates. The risk of a significantly more expansionary ECB policy is not properly reflected in the FX market.

For a long time the ECB was known as a central bank which was able to over-deliver compared to market expectations. This impression was destroyed by the December meeting. In December  the  ECB  significantly  disappointed  market  expectations  of  a  “strong” move,  by only delivering a small rate cut. And indeed: ECB President Mario Draghi’s old strategy – to create market expectations, which put the other Council members under pressure to deliver – failed spectacularly in December. That, however, does not imply that the ECB will always and forever be a paper tiger. Even under the assumption that Draghi did not find a sufficiently  large  majority  for  strong  measures  in  December  (which  would have  pushed  EUR-USD down),  we must concede: under different circumstances those who had opposed stronger measures in December might have behaved differently. And the relevant aspects of “circumstances”include the EUR exchange rates.

Yes,  of  course,  the  ECB  officials  will continue  to  formally  stick to  the  G7  London  accord, which implies that central banks refrain from manipulating exchange rates. This is the reason for Draghi’s regular statement that exchange rates would not be a policy target for the ECB.  Inside  the  London-accord  frame,  however,  the  ECB  does  everything  to  create  the impression that it would prefer lower EUR exchange rates. No wonder, as the exchange rate channel is the last one still functioning nearly normally. The ECB has all reasons to be concerned  regarding  inflation.  And  therefore  it cannot  afford to  accept  higher  EUR  exchange rates.  Elevated  EUR-USD  exchange  rates  therefore  increase  the  probability  of  stronger-than-expected ECB measures in March  – and therefore of a significant correction in EURUSD. The FX market is largely ignoring this risk. EUR-USD risk reversals trade at elevated levels. In fact only some days ago they printed in positive territory  –  a  situation we haven’t seen since mid-2009 (figure 1). The market obviously regards the risk of sharp down moves in EUR-USD as small.

In their central scenario our ECB watchers still assume that the ECB will indeed only deliver another small (10bps) rate cut in  March. This would certainly not create significant downward pressure on EUR-USD or other EUR exchange rates. This scenario still is possible.  But it is based on the assumptions that (a) financial markets calm down again and (b) EUR-USD  trades  at lower  levels  than  currently.  The  fact  that EUR-USD  can  gain in  phases of weak stock markets can only be explained by the market’s assumption that the ECB would hardly  react  on  negative  circumstances.  This  assumption  is  brave.  Every  day  of  financial market turbulence and every pip of higher EUR-USD quotes increases the probability of a more aggressive ECB.

For the medium-term (i.e. after March 10th) I see good chances for EUR-USD  –short positions. And I expect lower EUR-USD riskies again.


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UBS Research – FX Flows: USD weakness not echoed in flow data

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UBS Research Global FX Comment PDF Report


A mixed picture…

The theme of the week was broad based dollar weakness, but USD flows were less clear-cut showing a more or less flat picture (Figure 1). Despite the notable 3% rally in spot EURUSD over the week, EUR actually saw the second largest outflow in G10 after NZD. Yen flows were more in-line with price action, with noticeable JPY inflows helping reverse the entire USDJPY rally following the BoJ’s NIRP announcement, and leaving the pair down 3.4% on the week. Sterling topped the G10 chart in terms of net inflows, with hedge funds recording the 10th consecutive week of net GBPUSD buying – a record since we began compiling FX flow data. In EM, the picture was also mixed with TRY, SGD and ZAR seeing notable net inflows, whilst HKD, BRL and CZK were net sold.

FX Flows & Turnover

EURUSD: In a similar pattern to the last two weeks, EURUSD was again aggressively sold by hedge fund clients. Asset managers and corporate clients were net buyers as private clients moderately sold the pair, but on the whole EURUSD was sold.

USDJPY, EURJPY:  USDJPY was strongly sold by asset managers and hedge fund clients, and to a lesser extent by corporates. Private clients were net buyers of the pair but on the whole USDJPY was decisively sold. EURJPY was more or less flat with some hedge fund buying being offset by asset managers selling.

GBPUSD, EURGBP: GBPUSD was bought by all groups except private clients, who marginally sold the pair. EURGBP was sold by all client groups except hedge funds who modestly bought the pair. On the whole sterling saw good demand and was net bought versus both USD and EUR.

USDCHF, EURCHF: CHF flows lacked clear directionality. EURCHF was flat for all intents and purposes, with modest hedge fund inflows being offset by corporate client outflows. USDCHF was slightly net sold on the back of asset managers and private clients.

USDCAD, AUDUSD, NZDUSD: CAD saw a third week of inflows, primarily on the back of hedge funds, and with some participation from corporate clients. Both Aussie and Kiwi were net sold, with hedge fund clients again leading the charge as other clients showed limited directionality.

EURNOK, EURSEK, USDNOK, USDSEK: SEK saw good demand against both the EUR and the USD, helping it claim the second position in the G10 flow score card. Asset managers were noticeable buyers of SEK against both EUR and USD. NOK was net sold versus the EUR, mostly as a result of hedge fund flows, and was flat versus the dollar.

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Credit Suisse FX Daily – EURGBP maintains a large bullish base above .7494.

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Credit Suisse FX Daily Research

Today’s highlights:
■ EURUSD  has  initially  been  capped  below  61.8%  retracement  resistance  at 1.1259, but we stay bullish for 1.1387, then 1.1459/95.
■ EURGBP maintains a large bullish base above .7494.
■ USDJPY spotlight remains on critical support at 116.15/115.97.
■ AUDUSD  below  .7002/.6986  can  set  a  top  and  again  expose  the  .6828/27 early year lows.
■ GBPUSD  has  found  a  cap  at  the  50%  retracement  barrier  and  “neckline” resistance at 1.4660/4701.
■ USDCHF reinforces a top below former trendline support now at .9977.
■ USDCAD  has  found  fresh  buying  interest  at  the  38.2%  retracement  of  the March 2015/January 2016 rally at 1.3631.

Today’s trades/positions:
■ EURUSD: Long at 1.1155, stop below 1.1054 for 1.1450.
■ USDJPY: Short at 117.30, stop above 117.80 for 116.05.
■ GBPUSD: Flat. Sell again at 1.4590, stop above 1.4669 for 1.4150.
■ USDCHF: Flat. Sell at 1.0025, stop above 1.0078 for .9805.
■ AUDUSD:  Flat.  Sell  at  .7150,  stop  above  .7220  for  .6830.  Also  sell  on  a direct break below .6986.
■ NZDUSD: Flat. Sell at .6680, stop above .6753 for .6365.
■ USDCAD: Assume flat, buy at 1.3800, stop below 1.3710 for 1.4100.
■ EURJPY: Long at 130.05, stop below 129.50 for 131.90.
■ EURGBP: Long at .7585, stop below .7520 for .7750.

Societe Generale – In the Charts Forex

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Societe Generale Research

Today’s key points

Having achieved our advocated target of 0.7750,  EUR/GBP has been undergoing a pause. The pair has sustained above the confirmation level of the double bottom and inverted H&S at 0.75/0.7450 which remains an important support. Recently, the pair has rebounded after testing a multi month trend support (currently at 0.76) and is now closing in on January highs of 0.7750. It is noteworthy that it has completed a typical 3-year down cycle earlier and further recovery looks  on  cards  however  a  break  beyond 0.7750  will  be  needed  to  signal  a  larger  pullback towards September 2014 highs of 0.8070/0.81.

After testing intermittent resistance at 100/100.40, the Dollar Index is undergoing a short term pullback. Very short term, it has tested the triangle limit at 96/95.60 and is now approaching towards  immediate resistance at 97.45. A move below 96/95.60 will mean a test of 94.40, the 76.4% retracement of recovery since last August. Please refer to the  Chart Alert  published last week about an alternative view on the index.

USD/CAD probed the multiyear ascending channel support last week at 1.3760/1.37, where it has formed a  daily  hammer and bullish engulfing. With daily stochastic indicator near  a  trend support, a recovery looks possible. A break above 1.3910, a steeper descending trend will lead to  a pullback  initially  towards  1.4170 and even towards 1.4290/1.4330, the 61.8% retracement from January highs.

Deutsche Bank G10 Trade Idea of the Week – Short EUR/SEK

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Deutsche Bank Research

Target 9.15, stop 9.52, entry 9.4250
These  are  relatively  good  levels  to  reenter  EUR/SEK  shorts,  Thursday’s
Riksbank  meeting  notwithstanding.  Even  if  the  Riksbank  were  to  cut  rates
again, a very strong domestic data pulse mean that the move should be faded.

Goldman Sachs – China: FX reserves fell US$99bn in January to US$3.23tn

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Goldman Sachs ResearchBottom line:

The PBOC’s FX reserves decreased US$99bn to US$3.23tn in January (Bloomberg
consensus: -$118bn; December: -$108bn). After adjusting for estimated currency
valuation effects, the fall in reserves may have been about US$89bn (vs. estimated -$130bn in December).
As has been the case in the last few months, additional SAFE and PBOC data, likely
to be released in the next two weeks, should give useful supplemental information
regarding the underlying flow situation.

Main points:
The People’s Bank of China (PBOC) reported that its foreign exchange reserves fell
by US$99bn in January (vs. a US$108bn decrease in December), to US$3.23tn at the
end of the month. We estimate that currency valuation effects could amount to
around -US$10bn (assuming the currency composition of China’s FX reserves is
similar to that of the global average), and therefore sales of FX reserves might have
been about US$89bn in January (vs. estimated $130bn in December). The continued
rapid loss in FX reserves suggests that FX outflow remained at a rapid pace.
As we have discussed previously, however, headline FX reserve data do not
necessarily give a comprehensive picture on the underlying trend of FX-RMB
conversion by corporates and households. This is not related to any accuracy issues
of reserve data, but is due to the fact that valuation effects are uncertain and that
other non-PBOC financial institutions may also use their (spot) balance sheet to
absorb underlying flow pressures. Correspondingly, the PBOC or related entities
may have accumulated forward positions that do not affect reserves immediately.
In our view, a preferred gauge of the FX-RMB conversion trend amongst onshore
non-banks would be based on SAFE data on banks’ FX settlements on behalf of their
onshore clients. That report captures banks’ FX transactions vis-à-vis non-banks
through both spot and forward transactions, and will be out on February 23. Data on
the positions of FX purchases by the banking system should also shed useful additional light, and are likely to be released around middle of the month (we
discussed the coverage and definitions of various official FX data sets in Asia
Economics Analyst: Sizes and Sources of China’s Capital Outflows, January 26,

Deutsche Bank – Early Morning Reid – August 28

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Deutsche Bank Research

Citibank FX Pick of the Day

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Citi Research

UBS FX Strategy: Spot Desk – More USD Buying

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UBS forex research



Spot Desk – More USD Buying

Zurich Spot Desk


EURUSD: Market participants that took advantage of the short squeeze earlier in the week were happy to take some profit ahead of the 1.1200 level that was toppish for almost two months; the pair has dropped 500 pips from the Monday high. Expect buying interest below 1.1200, while sellers will be lined up ahead of 1.1360/70. Flows are split between those piling into fresh USD longs and short term profit-takers. Support at 1.1230, 1.1200, and 1.1150; resistance at 1.1270, 1.1305, and 1.1365.

USDCHF: The US dollar has been trading strong after good US data, and many in the market had to jump on the bandwagon after getting squeezed out of position earlier in the week. We think the rally in risk is still fragile and volatility will surely persist for a while. The pair has tested the resistance at 0.9660/80, so if you are looking for a level to sell at, that might be it. Support at 0.9580 and 0.9541. Despite the strong rally yesterday, EURCHF remains in range. Support at 1.0750; resistance at 1.0880/1.0900.

Cable continued its downtrend yesterday, but stopped abruptly at the 200-day moving average. The pair was offered all day with the US dollar being bought across the board. EURUSD came off its high and we saw GBPUSD trade through the 100-day moving average at 1.5472 and then below 1.5400. It feels like US dollar buying could continue at lower levels. GBPUSD support at 1.5371, 1.5330, and 1.5191; resistance at 1.5454, 1.5508, and 1.5594.

EURGBP: We are biased towards selling rallies to the 200-day moving average at 0.7360. Support at 0.7279, 0.7260, and 0.7200; resistance at 0.7359, 0.7400, and 0.7421.

AUDUSD has been grinding higher on the sharp bounce in risk-on sentiment and the correction for oil. The poor capex figures yesterday and higher US yields probably explains why the pair’s move higher has been reluctant. Watch USD/EM to see if there is a further correction. If so, AUDUSD could trade back up to 0.74/0.75. We are skeptical that this rally in risk is sustainable, but recommend staying flexible because there has only been a small AUDUSD so far, relative to the moves for USDJPY and EURUSD.

NZDUSD has been trading in-sync with AUDUSD. There should be decent support at 0.6400, with the risk of a move up to 0.66/0.67.

USDCAD is trading around the same level as yesterday, but oil has gained a lot of ground, so as long as the general picture doesn’t change we are happy to be short up to 1.3220/30, with a stop above 1.3250, targeting a move towards 1.3140/50.

EURSEK and EURNOK came under pressure yesterday, with the latter leading the way on the correction for oil. Sell rallies in EURSEK towards 9.60, with a stop above 970; it is currently trading just above the support at 9.49/9.50. Sell EURNOK rallies between 9.40 and 9.50, with a stop above 9.60. The key pivot in the downside is 9.20. Swedish retail numbers are due this morning at 9:30am CET, with Norwegian unemployment data at 10:00am CET.

Barclays FX Thoughts for the Week Ahead – From one anxiety to another

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FX Thoughts for the Week Ahead

From one anxiety to another

Growing concern about Chinese economic activity has left FX markets little time to consolidate following the recent conditional agreement between Greece and its creditors. Much like the well-known “whack-a-mole” game, one source of volatility and anxiety has been quickly replaced with another. Following the sharp decline in Chinese equities in June and early July, indicators of Chinese activity have begun to deteriorate with last week’s July manufacturing PMI falling to a 15-month low, deep into contractionary territory and disappointing market expectations by a large margin (China: July ‘flash’ PMI plunges unexpectedly, 24 July 2015). Commodity prices and related currencies such as AUD, NZD, CAD and NOK have fallen significantly over the past month. We continue to expect further commodity currency weakness amid a relatively unsupportive risk environment and our greatest conviction lies in additional AUD downside from still-overvalued levels (~10%). In contrast to the RBNZ, which cut its policy rate by 25bp last week to 3.00%, the RBA appears unwilling to deliver necessary monetary stimulus given financial stability concerns related to rapidly rising Sydney house prices. As such, the currency will likely have to do the work and we continue to recommend being short AUDUSD targeting 0.7000. (See Macro Daily Focus: Commodity currency contagion, 15 July 2015).

USD strength has been another important theme for FX markets over the past month and should be underscored this week by the FOMC rate decision and Q2 GDP data. Although not committing firmly to a September rate hike (our call, versus market pricing of January 2016), given recent market volatility related to Greece and China, Wednesday’s FOMC statement should reflect the recent US economic data strength. Indeed, data released on Thursday should reveal above-consensus US Q2 GDP growth of 3.0% q/q saar, driven primarily by strong consumption growth and a boom in residential investment. Overall, we think the USD should appreciate in both “risk-on” and “risk-off” states of the world. In “risk-on” states, superior US economic fundamentals are likely to support higher returns to capital and currency appreciation. In “risk-off” states, the USD is likely to be supported by its highly attractive safe-haven attributes including low volatility in asset returns (see Three Questions: Top dollar, 4 June 2015).

FX option markets suggest USD long positions have become surprisingly cheap. Indeed, 3-month 25-delta risk-reversals across liquid G10 currencies, excluding the JPY, suggest USD calls are now close to their deepest discount versus puts, based on data since 2010 (Figure 1). As such, we think this is a particularly opportune time for investors to express a long USD view via options given our expectations of US data/events this week and broader bullish USD view. While we expect continued commodity currency weakness against the USD, our forecast for extremely low euro area inflation (Friday) and sub-consensus UK Q2 GDP (Tuesday) should also provide a catalyst for further EUR and GBP weakness versus the USD.

Several EM central banks are scheduled to meet this week. In EMEA, BoI is widely expected to leave policy settings unchanged on Monday while we and consensus expect the CBR to slow the pace of easing and lower its policy rate by 50bp to 11% on Friday. In LatAm, we and consensus expect the BCB to hike the Selic rate 50bp on Wednesday. Banxico is likely to leave rates unchanged on Thursday amid all-time low inflation.

Figure 1: G10 3-month 25-delta risk reversals










Note: Data since Jan 2010. Dashes show max and min, boxes cover 10th to 90th percentile.
Source: CFTC, Bloomberg, Barclays Research


Trade for the week ahead: Buy the EURUSD 3m 25d risk reversal (buy the put, sell the call)

As discussed above, USD calls have become extremely cheap and we recommend expressing our bearish EURUSD view by buying the 3-month 25-delta risk reversal (buying the put with a strike of 1.0584, selling the call with a strike of 1.1389, spot reference: 1.0964) for 11bp. Our technical strategist is also bearish EURUSD and looks for selling interest near 1.1050 to cap near-term upticks. A move below support in the 1.0810 area would confirm a top under the 1.1470 range highs and signal further downside traction. His initial targets are towards 1.0675 and then the 1.0460 year-to-date lows. His greater downside targets are in the 1.0200 area (Figure 2).

Figure 2: EURUSD from a technical perspective













Source: CQG, Barclays Research.


What to look for this week

USD: A more optimistic outlook

The FOMC rate decision (Wednesday), first Q2 estimate of GDP (Thursday) and Employment Cost Index (Friday) are the main events for the week ahead. The FOMC statement should not present material changes, but risks are tilted towards a more optimistic rhetoric as recent economic data have improved and near-term risks regarding Greece have receded. The Employment Cost Index should shed some light regarding wage pressure (Barclays and consensus: 0.6% q/q, 2.4% y/y), as it is one of the measures that better correlates with core inflation. On top of this, we expect the first estimate of the Q2 GDP to confirm that Q1 weakness was influenced by transitory factors. We anticipate an above consensus 3.0% q/q growth (consensus: 2.5%) with consumer spending advancing at a 2.7% rate. This suggests that the USD will likely continue with its upward trajectory, having an additional support from soft commodity prices and a slowing China.

EUR: Extremely low inflation to drive further currency weakness

Euro area flash July HICP inflation (Friday) should confirm extremely low inflation and support the ECB’s continued commitment to its Public Sector Purchase Programme (PSPP). We forecast HICP and core inflation to have eased 0.1pp to +0.1% (consensus: 0.2%) and +0.7% (consensus: 0.8%), respectively. Indeed, we think that the ECB will continue its monthly asset purchases at the same pace until September 2016, and probably even longer as we believe the increase in inflation will likely be slower than the ECB currently projects. Moreover, we believe that the chance that additional measures will be announced by the end of this year is non-negligible and will depend on financial market developments, especially in conjunction with upcoming discussions about the third Greek bailout (see ECB committed to fully implementing QE, 16 July 2015). As such, we continue to expect substantial EURUSD depreciation over the coming year as ECB monetary policy diverges materially from that of the Fed’s and a large degree of economic slack weighs on euro area returns to capital (see FX Themes: A weaker EUR, at the core of our views, 25 June 2015).

GBP: Q2 GDP in focus  

In an otherwise quiet week for UK data and events, focus will centre on UK Q2 GDP (Tuesday); we forecast 0.6% q/q growth, slightly below the consensus forecast of 0.7%. Wednesday’s lending report may also gain some attention. We expect mortgage approvals to edge up slightly in June to 66.5k (consensus 66.0) and mortgage lending to increase to GBP2.2bn (consensus: GBP2.0bn) in line with BBA data released on Friday. Meanwhile, we and consensus expect consumer credit to increase GBP1.1bn.

GBP FX and rates have been volatile over the past month, driven in part by the media’s more hawkish reporting of recent BoE communication (for example, Carney’s comments at the BoE Inflation Report Treasury Select Committee hearing) and disappointing economic data (for example June retail sales). Overall, we remain comfortable with our view of modest GBP outperformance versus the EUR but material depreciation against the USD. The BoE MPC vote for rate rises remains 9-0 against. While some members (Martin Weale, for example) are moving closer to a voting for tighter policy, inflation remains nonexistent and will likely only reach 0.3% y/y by year-end. As such, it will likely take until Q1 next year before the majority of the committee agree to hike the Bank Rate. Furthermore, tight fiscal policy and downside risks to business investment and confidence related to the EU referendum mean that the likely pace of policy tightening will be extremely moderate once it begins.

JPY: Eyes on Japanese data and politics, but focus remains on the Fed

USDJPY remained range-bound around 124 last week after rebounding sharply from 120 on receding Greek concerns. Recent price action has been consistent with our view that USDJPY should oscillate around 123 with risks on both sides. Upside risks include a bringing forward of Fed hike expectations and downside risks include a deterioration of risk sentiment (see Global FX Quarterly: In the dollar we trust). Having said that, Japan factors have become less supportive of the yen recently, including slowing economic activity, decelerating core CPI, and a sharp drop in approval ratings of the Abe administration.

Economic data have disappointed lately, suggesting that Q2 GDP will contract and y/y core CPI will likely to turn negative again over the summer/fall. In this light, the June Household survey (Friday), June Industrial Production (Thursday), and June Core CPI (Friday) will demand some attention this week. We expect June real household spending to increase +2.8% y/y (consensus: +1.9%), the second consecutive month of positive y/y growth. We forecast June Industrial Production to increase +0.1% m/m (consensus: +0.3%), but translates to a 1.8% contraction in Q2 as a whole. On inflation, we look for June core CPI to stay at +0.1% y/y (consensus: 0.0%) from +0.1% in May. Furthermore, major polls show that approval rating for Abe administration plummeted to sub-40%, the lowest rating since Abe’s inception in December 2012, likely over the controversial security bills. A combination of worsening economic activity, decelerating core inflation on the back of falling oil prices, and a deteriorating cabinet approval rating suggest that there may be less incentive for political jawboning against yen weakness than there was a month ago. All in all, Japanese data and political development will continue to demand close monitoring while Fed hike expectations likely remain the main driver of USDJPY in the weeks ahead especially given important US events, including FOMC, GDP, core PCE deflator, and nonfarm payrolls.

CAD: On the brink of recession

Despite the better-than-expected retail sales print in May (1.0% m/m vs. consensus 0.6%), we believe that the ongoing decline in the price of oil and other commodities and the weakness in investment will continue to weigh on the performance of the Canadian economy and hurt the loonie. After the recent cut in the BoC’s reference rate, the market will be following economic data to assess the possibility and timing of further easing. In that respect, the release of May’s monthly GDP next week will be the focus of the market (consensus 0.0% m/m) and will allow for a better assessment of the current state of the economy. A disappointing GDP reading would most likely bring Canada into technical recession (after a first-quarter GDP decline of 0.6%), putting pressure on BoC to commit to further easing. On the other hand, a GDP reading closer to BoC’s projections would give the central bank some room to wait. Particular attention will be paid to non-resource exports and consumer spending, which the BoC hopes will help cushion the negative effects associated with the decline of Canada’s terms of trade.

SEK: Activity data to test recent SEK weakness

Activity and confidence data releases in the coming week are expected to steer the path for the SEK, likely confirming a positive economic outlook. Solid retail sales (Tuesday) and the preliminary release of Q2 GDP (Thursday) should help unwind some of the recent currency weakness following the surprise Riksbank cut, which has driven EURSEK close to the top end of its recent multi-month range, contrary to our expectations. Moreover, the release of the Economic Tendency Report (Wednesday) will provide further insights into the country’s economic outlook and we expect the ETS Index to resume its uptrend. In line with the market (2.6% y/y) and the Riksbank’s (2.8% y/y) expectations, we expect a solid rebound in Q2 economic activity (Figure 3) despite the recent weaker-than-expected data reflected in our DSI (Figure 4). We think the trend of weaker data is likely to only prove temporary. Further ahead, we continue to expect a modest pick-up in inflation and further improvements in the Swedish labour market, likely allowing the Riksbank to tolerate moderate currency strength. We remain short EURSEK on the basis of the superior growth prospects in Sweden, a very undervalued SEK and our expectations that the Riksbank is close to the bottom of its easing cycle and see the recent uptick in EURSEK as an opportunity to re-engage in short positions (see SEK: Inflection point, 12 June 2015).

Figure 3: Growth expected to remain solid Figure 4: Recent data weakness likely to be temporary
Barclays_image003 Barclays_image004
Source: Riksbank, Haver Analytics, Barclays Research Source: Bloomberg, Barclays Research

NJA and AUD: USD-Asia crosses moving higher across the board

USD-Asia crosses have pushed higher over the past two weeks after Fed Chairman Yellen signaled that the FOMC is likely to raise rates later this year. USDKRW, USDSGD and USDTHB have led the move higher in region, and now the previously lagging currency pairs like USDTWD, USDIDR and USDMYR have started to move out of their consolidation ranges of the past one month. We expect the strong USD trend to persist, especially with the lack of a convincing turn in economic activity in Asia. Korea’s Q2 GDP print surprised to the downside last week, and this week’s July exports print for Korea (Saturday 1 August) is likely to worsen to -7.5%y/y from -1.8% previously, adding to negative sentiments to the KRW. Korea’s June IP (Friday) is also likely to remain in contraction on a y/y basis (Barclays: -0.5%; last: -2.8%). In Taiwan, we expect Q2 GDP (Friday) to slow to 3.0%y/y from 3.4% in Q1, given weak exports and IP of late. Thailand’s manufacturing output and exports for June (Monday) are likely to show negative prints (y/y basis), weighed by poor demand from China. We expect China’s Official PMI for July (Saturday) to edge up to 50.4 from 50.2 with some signs of improved trade momentum, but the unexpected drop in the Markit ‘flash’ PMI raises the risk of disappointment which would add further pressures on commodity currencies like the AUD. That said, technicals show currency pairs like USDKRW and USDTHB are currently in short-term overbought territory, and thus a temporary pullback may be possible even if macro data continues to disappoint. However, we think that the USD would stay strong over the course of H2.

LatAm: No reasons for Banxico to have a hawkish bias; BCB to deliver 50bp hike

Mexican inflation at new all-time lows should weigh on Banxico’s decision next week. Despite recent weakness in EM currencies, we find little evidence of a broad FX pass-through and think that Banxico has enough arguments to soften its language. Economic growth below potential and a subdued optimism around reforms coupled with well-anchored inflation expectations will likely keep Banxico in check in the next few months. Any decision to hike in the months ahead will be strictly dependent on the Fed’s action and MXN developments. In addition, we believe that Brazil’s developments and China’s growth concerns will continue exerting some pressure in the MXN. We remain confident that USDMXN will continue its upward trend towards out forecast of 16.50, but we acknowledge the risks of a pullback in the short-term given how stretched the positioning is. 15.90-16.00 should serve as a good entry point to re-establish/add long USDMXN positions.

In Brazil, despite very weak economic data in the past few weeks, we believe the BCB will hike the Selic rate by 50bo in its next meeting (in line with consensus). After last week’s adjustment in the primary surplus and recent inflation developments, we think that Copom models will continue showing that more tightening will be necessary in order to move inflation to the midpoint of the target in 2016 and to strengthen the process of anchoring inflation expectations. While this keeps monetary conditions tight, fiscal imbalances continue to deteriorate in an environment of a very weak economy and subdued global economic growth. This should weigh on Brazilian assets risk premia, exerting additional pressure to the BRL as a credit rating cut looks more likely.

EMEA:  CBR, BoI and CBT to decide policy

In Russia, we and consensus expect the Bank of Russia (CBR) to slow the pace of easing and lower its policy rate by 50bp to 11% on Friday MPC meeting. At the most recent meeting, the CBR signaled that it will slow the rate of cuts in upcoming meetings and did not rule out possibly remaining on hold depending on the data. We think the CBR has reasons to continue cutting. While inflation remains high it is likely to experience a marked decline towards 7.5% by mid-2016. Meanwhile, the growth trajectory remains depressing as June real sector data confirm the recession. In addition, the recent decline in oil may give some incentive for RUB weakness to partially offset the unfavourable impact on fiscal balance.

In Israel, Bank of Israel (BoI) is widely expected to remain on hold at 0.10% next week. Inflation has started to increase, and the BoI forecasts that it will move up to the centre of the target by mid-2016. However, ILS appreciation remains unwelcome given the underperformance in exports, and recently caused the BoI to considerably increase its FX intervention. We reiterate our long USDILS recommendation ahead of the rates meeting.

In Turkey, CBT will publish its July quarterly inflation report next week. It will be important to see whether CBT will have any revisions in inflation forecasts on the back of recent TRY weakness; and provide any insights on potential simplification of monetary policy in the coming months, which seem to be expected by the local market participants.