AUD: To Receive Short-Term Lift & RBA Unlikely To Stop Its Rally This Year – Morgan Stanley

AUD to receive short-term lift. To be clear, this is not because we are bullish on the medium-term outlook; Australia has done little to improve its medium-term inflation outlook, the housing market remains a key downside risk for 2017,valuation is relatively rich and external accounts make it vulnerable.

However, we would say that everything in Australia is ‘good enough’ to keep the currency appreciating and keep the RBA on the sidelines amid the global search for yield. YoY GDP growth in 2Q hit its highest level since 2012(with mixed quality), the unemployment rate continues to fall (though other employment metrics are weak), and China’s stability has kept iron ore prices stable. House prices have failed to meaningfully decelerate, though forward-looking indicators look more worrisome, raising concerns about financial stability which the RBA emphasized in the most recent agreement on its monetary policy framework.


All in though, these developments are not enough to push the RBA to act this year and are enough to keep AUD appreciating in the search for yield environment.

While the RBA certainly wants a lower AUDUSD, the failure of the last rate cut to weaken AUD is likely to make it think twice about using the policy rate as a tool for FX depreciation.

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USD: Subject To A 'Large Appreciation' On 'Backward Induction' – Goldman Sachs

Much of the focus in recent weeks has been on whether the Fed will hike rates this year.

We side-step that debate and work backwards, looking at what interest rate futures price in the medium term. Through mid-2019, i.e., over the next three years, fed funds futures suggest that little more than two hikes are priced , which is low even by the standards of the most ardent R-Star proponent. Further out, Eurodollar contracts show less than four hikes by 2021. One question is why market pricing is so low, something we revisit below, but – with the market so dovish – this is almost beside the point. With Vice Chair Fischer floating two hikes in 2016 at Jackson Hole, two hikes in three years is low.

More short term, fed funds price 15bp for November and December combined, making the back and forth in Fed speak almost a side issue. In the end, markets are still reluctant to commit to a hike this year, which translates into upside for the Dollar into year-end.


The Dollar is something of a conundrum for the Fed. After many years of extraordinarily loose monetary policy, the Dollar is subject to large appreciation pressure. This complicates life for the Fed, because any hawkish shift could see the Dollar rise sharply, as in the aftermath of Jackson Hole, threatening – via the negative hit to growth and inflation – to undermine the very rationale for the hawkish shift. Governor Brainard noted as much in a recent speech when she recognised the rising sensitivity of the Dollar to Fed surprises, something we have also documented.

On top of China worries, this might argue for a less predictable and perhaps shallower hiking cycle than we forecast, with prolonged pauses between hikes to manage expectations. This could reduce Dollar upside.


We still expect that the 300bp tightening cycle forecast by our US team maps into a 15% rise of the Dollar.

A 200bp cycle maps into two-thirds of that and so forth. By backward induction, given how dovish market pricing is, the hurdle for the Dollar to rally is low, while the hurdle for it to fall in any meaningful way is substantial.

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Another Frustrating Year For EUR Bears: What's Next? – BofA Merrill

Another frustrating year for EUR bears

Our year-ahead outlook for the Euro had warned of more frustration for EUR/USD bears and this has indeed been the case so far. For the rest of the year, EUR/USD is mostly a Fed call, in our view, as markets have already priced ECB QE extension. We expect the Fed to hike again in December, which may push EUR/USD lower by year-end. However, that may be the time to buy the Euro again.

Data suggests mixed EUR/USD outlook

Data suggests a mixed outlook for EUR/USD, which was also the case earlier this year. Data that has to do with the state of the recovery and inflation would justify a weaker EUR/USD. Data that has to do with the momentum of the economy would justify a stronger EUR/USD.

EUR/USD positioning suggests balanced risks

Our positioning analysis suggests that speculators are vulnerable to a positioning squeeze if EUR appreciates, while real money is vulnerable to a positioning squeeze if EUR weakens.

The ECB is becoming a positive risk for the Euro

We argue that the ECB is reaching self-imposed constraints that could affect its credibility with markets. The next QE extension requires only tweaks to the current QE program. However, we are concerned about ECB market challenges next year, similar to those the BoJ has been facing this year, when QE extension will require more fundamental changes to the program. Markets could challenge the sustainability of the ECB policies, leading to a stronger Euro in 2017, despite diverging monetary policies.

A strong Euro can coincide with a periphery sell-off

The periphery problems remain, but markets have become immune to them because of the ECB’s QE. We believe the periphery could lose the ground under its feet if the market starts pricing the end of the ECB’s QE. A periphery sell-off in this case would be consistent with a stronger Euro, both driven by the same force.

We are bullish EUR/JPY medium term

Although in the short-term the Euro will likely depend mostly on the Fed, in the medium term we are bullish EUR/JPY. The BoJ has partly addressed its recent challenges by increasing the flexibility and improving the sustainability of their policy framework. However, it is now the ECB’s turn to relax its QE constraints, which may prove to be even more difficult than for the BoJ. Fewer challenges for the BoJ and more challenges for the ECB should be positive for EUR/JPY, in our view. Relative ECB and BoJ balance sheet expansion and relative data both point to a much stronger EUR/JPY (Chart 3), Chart 4 and Chart 5). We project EUR/JPY to appreciate to 127 by the end of 2017, with risks to the upside, although we note the US elections will be an important component to monitor in the short term.


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EUR: 'Stuck Between Deutsche and Deutschland' – Credit Agricole

Concerns about the fate of the largest German lender have captivated investors’ attention of late. EUR has emerged relatively unscathed so far, however, and this seems to be due to several reasons.

1. Investors still seem to view the Deutsche Bank troubles as an isolated incident with limited impact on the Eurozone banks, especially if one looks beyond Italy’s troubled lenders (Figure 1).

2. There is limited evidence that the Deutsche selloff is having a negative impact on German and European economic confidence (Figure 2).


We suspect that EUR is also holding up because of the unwinding of short-EUR hedges by investors trying to flee the Eurozone capital markets. A potential escalation of market concerns could trigger further unwinding of EUR-funded carry trades and support the single currency.

The downside risks for EUR should linger for now, as concerns about Eurozone banks may force the ECB to dig deeper into its monetary easing toolbox. Political uncertainty could also grow as investors’ attention shifts to the constitutional referendum in Italy on 4 December.

That said, EUR’s safe-haven appeal should limit the damage from any renewed selloff and we see EUR/USD at 1.1000 into year end. The European risk-correlated currencies (G10 or not) and GBP, as well as other G10 commodity currencies, may have to bear the brunt of any risk selloff in response to a deteriorating outlook for European banks.

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Oil Prices Temporarily Boost CAD; Now What? – CIBC

The calm waters that prevailed over the summer months have turned choppy for the Canadian dollar. OPEC’s efforts to trim production have left the loonie stronger this week, offsetting the weakness resulting from a more hawkish-than-expected Fed. But, at the end of the day, it’s unclear whether the cartel will end up sticking to the lower target, with the details of the agreement left to be hashed out in November and OPEC having a spotty record in terms of its ability to stick with quota limits.

Given that core inflation has fallen below target and the Fed is standing ready to hike interest rates this year, we continue to see the Canadian dollar weakening as the year winds down. Certainly, a soft first half of the year for growth has left the economy struggling to keep the output gap from widening and markets are now pricing in roughly a 25% chance of a rate cut by next January.


The fact that slightly higher oil prices in the near term have pushed the dollar stronger, but won’t materially change investment intentions in the oil patch, could actually increase the chances of a rate cut from the central bank, with the stronger currency a headwind for exporters. It’s true that federal stimulus, directed towards middle income families and infrastructure, will likely keep Governor Poloz on hold for the remainder of the year. But a longer-than-anticipated rotation away from domestic consumption and toward investment and exports will see the central bank sending dovish signals to the market over the next year, largely to keep financial conditions from tightening via the currency.

All told, the C$ could slide to 1.35 by year-end before trading in a range of roughly 1.34-1.37 in 2017.

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EUR/USD Forecast October 3-7

EUR/USD[1] ended the month of September with further range trading, slightly leaning lower, as central bankers did not rock the boat. Will it make a break in October? PMIs and the ECB’s meeting minutes stand out in the new quarter. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.

German business confidence jumped[2] according to IFO, in line with relatively upbeat PMIs. Despite a rise in headline inflation, core inflation refuses to budge[3], creating a headache for the ECB. Draghi did not say anything of high significance in the closing week of September. In the US, consumer confidence came out at the highest since 2007[4], but durable goods orders were quite mixed[5]. The final GDP read came out marginally better than expected in the US, but at 1.4%[6], growth remains very slow.


EUR/USD daily graph with support and resistance lines on it. Click to enlarge:


  1. Manufacturing PMIs: Monday: 7:!5 for Spain, 7:45 for Italy, final figure for France at 7:50, final German number at 7:55 and the final euro-zone PMI at 8:00. In August, Spain had a score of 51 points for the manufacturing sector, reflecting weak growth. A rise to 51.6 is expected. The 50 point line separates growth from contraction. Italy, the third-largest economy, had a score of 49.8, just in contraction territory. A move to 50.2 is predicted. According to the initial release for France for September, the second-largest economy, manufacturing was also in the red with 49.5 points. On the other hand, Germany enjoyed nice growth with 54.3. The euro-zone had 52.6 points. The last three numbers will likely be confirmed now.
  2. Spanish Unemployment Change: Tuesday, 7:00. Spain still has a staggeringly high unemployment rate, despite some improvement. The monthly gauge of joblessness rose by 14.4K in August, slightly better than expected. Seasonal factors are in play here, as Spain’s tourism industry is a significant source of income for the economy. A rise of 23.5K is projected.
  3. PPI: Tuesday, 9:00. The Producer Price Index has been positive in the past three months, rising by 0.1% in July. Producer prices eventually feed into consumer prices. A “no-change” outcome is estimated now.
  4. Services PMIs: 7:!5 for Spain, 7:45 for Italy, final figure for France at 7:50, final German number at 7:55 and the final euro-zone PMI at 8:00. Contrary to the manufacturing sector, Germany under-performs in comparison to its peers. In August, Spain enjoyed strong growth according to Markit, with 56 points. A slide to 54.8 is forecast now. Italy had a score of 52.3 points back then, with 52.1 on the cards now. The preliminary figure for September for France showed a solid 54.1 points score. Germany’s number was closer to the balance between growth and contraction at 50.6 points and the whole euro-zone figure stood at 52.1 points. The last three figures will likely be confirmed now.
  5. Retail Sales: Wednesday, 9:00. Despite being released after the German and French releases, the wider figure can certainly surprise. A strong rise of 1.1% was seen in July, better than expected. After Germany disappointed, a drop of 0.1% is expected in the all-euro-zone figure.
  6. German Factory Orders: Thursday, 6:00. The indicator tends to be volatile, but in the previous release, it advanced by meager 0.2%. Another small advance is on the cards: 0.3%.
  7. Retail PMI: Thursday, 8:10. After two months under 50 points, this purchasing managers’ index by Markit topped to the 50 point threshold and reached 51 in August.
  8. ECB Meeting Minutes: Thursday, 11:30. These are minutes from the September meeting, in which policy was left unchanged. QE changes are on the cards, but no details were provided[7]. Will the relatively dovish tone be seen in this document as well? This is an opportunity for the ECB to push out its intentions, but no action is expected until December.
  9. German Industrial Production: Friday, 6:00. A disappointing drop of 1.5% was recorded in July, countering a rise seen in June. If the see-saw continues, we could see a bounce back in August: 1.1% is projected.
  10. French Industrial Production: Friday, 6:45. The second-largest economy also saw a drop in output, with -0.6% back in July. Also here, a rebound is on the cards: 0.7%.
  11. French Trade Balance:  Friday, 6:45. Contrary to Germany, France has an ongoing trade deficit. A 4.5 billion euro deficit was reported for July. Another negative month is likely now with a narrower deficit of 4.3 billion.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar remained supported at the 1.1125 level (mentioned last week[8]) but did not go too far to the upside. It eventually leaned lower.

Technical lines from top to bottom:

1.1535 is a stepping stone as seen in May 2016 and also beforehand. It is followed by the very round level of 1.15.

1.1460 was a key resistance line in 2015 and 1000 above the multi-year lows. 1.1410 capped the pair in early June. 1.1375 worked as resistance in February and as support in May 2016.

1.1335 worked as the bottom bound of a higher range and then capped recovery attempts in May. 1.1230 capped the pair after the fall in May and worked as resistance.

1.1190 is the post-Brexit high seen in July. 1.1125 cushioned the pair in early September. 1.1070 served as a clear separator of ranges during February and also beforehand.

1.10 is a round number and significant resistance. 1.0905 is the swing low seen in June and serves as a weak support. 1.0825 worked as support in early March 2015 and should also be watched. This is now a triple bottom.

The post-Draghi low 1.0780 replaces 1.08 as support. 1.0710 is the next support line on the chart after temporarily capping the pair in April 2015.

Further below, the 2016 low of 1.0520 and the 2015 low of 1.0460 provide further support.

I am neutral on EUR/USD

While there are many troubles brewing in Europe, the pair has shown extreme stability. This could extend for another week until monetary policy divergence pushes the pair to the downside.

Our latest podcast is titled Bold BOJ vs. Fearful Fed[9]

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USD Set For Modest Upside Especially Vs These 3 Currencies Into Final Months Of The Year – TD

We think the USD is likely to trade on a better footing, at least against some G10 counterparts as we progress through Q4.The search for yield will continue to propel higher-yielding commodity and EM currencies. Inevitably, however, carry trades rest on mix of low vol and steady returns. We are increasingly skeptical that this dynamic will extend well into Q4. As currency markets wrestle with the cross currents of rising political risks, the rotation from monetary to fiscal policy cues, and a less clear delineation between risk and reward, we expect investors to go ’back to basics’. This favors modest USD upside into the final months of the year.

Specifically, we note that the deviation between rate spreads and FX is particularly pronounced in some currencies. Political risks could also favour the greenback with the Italian referendum scheduled for the first week of December.

The JPY, NZD, and AUD are at the greatest risk of a sharp realignment with these fundamentals, especially when market positioning indicators are overlaid. This comes, crucially, just as the USD’s overall correlation with our measure of US economic data surprises has started to strengthen after a period of less reliability earlier this year. Even so, the tone of the USD strength is likely to be less pronounced than prior rallies given subdued expectations about the pace of the Fed’s normalization and questions over the outlook for the US economy over the coming years.


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GBP/USD: Set To Fall Further & Hold Below 1.30; Next Week's Soft PMI A Trigger – BNPP

The UK will receive an update on the health of its manufacturing sector post-Brexit next week, with the manufacturing PMI to be released Monday and production data to be released Friday.

So far, data have suggested that various worst-case scenarios in the aftermath of the referendum have not materialised. However, MPC members have signalled that they continue to expect a need for further easing later this year, and our economics team expects data to paint a picture of an economy that has effectively stalled.

We view the GBP as still vulnerable, and expect GBPUSD to hold below 1.30 despite broader USD weakness.

Market expectations for Bank of England easing continue to look too conservative in our view, with 5bp of rates cuts priced for the November meeting versus our economists’ expectations for a 15bp cut.

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Get Ready For A USD/JPY Rebound – SocGen

Failing to break 100 four times in a row The market, and probably the BoJ, are nervously eying USD/JPY at 100 as a key level that can decide the next trend. Since June, the FX rate attempted to break this support no less than four times but failed every time (Graph 1).

Importantly, these failures happened on the back of disappointment regarding the outcome of central bank meetings, where either the Fed indecision to hike or the lack of BoJ decisiveness pressured the USD/JPY downwards. In particular, the market bid the yen when the BoJ did not cut rates but marginally expanded QE, and lastly when the central bank introduced its yield control framework. The looming US election might be a future trigger, but, arguably, the market could now legitimately believe that after having missed neat and repeated opportunities to break lower, the USD/JPY is now unlikely to eventually experience such a move.

Lagging Treasury yields and boosted by oil gains Since the beginning of last year, US long rates have again become the main USD/JPY driver. The BoJ’s peg on JGB yields is going to kill yen rates volatility, so that the rates factor should become even more US-centric. But the mild Treasuries sell-off right after that, which saw 10y yields briefly trading below 1.40%, was not enough to lift the US dollar. At the same time, the FX market challenged the BoJ, so that USD/JPY and US yields diverged (Graph 2). This correlation is notably unstable, but the mean-reversion between FX and rates has been powerful over recent years. US rates are now unlikely to drift much lower and should not precipitate a USD/JPY break, meaning a catch-up higher is a more likely scenario. The current relationship suggests a move above 105.


Softer options positioning may pre-empt an unwinding of yen longs. Positioning in spot and options markets tends to evolve in tandem, even if options investors are expressing views with a conditional nature. Since the CFTC records futures positions, the current long yen positioning has only been matched by the 2008 peak reached when Bear Stearns collapsed. Such an extreme positioning is hardly sustainable, and the softer skew in yen options markets might be sending the signal that longs are eroding (the 3m risk reversal is decoupling from futures positions). On top of that, OPEC’s surprise announcement of production cuts is supporting risky assets, instating a risk-friendly environment (higher stocks and commodities), which should further discourage yen longs.

In other words, USD/JPY is consolidating at the end of the funnel, and cannot stay trapped at the same time above 100 and within its channel beyond mid-October. A break either way is therefore ‘programmed’ for the next two weeks, with our analysis above favouring the topside.

**SocGen maintains a long USD/JPY position in its portfolio from 100.30.

This trade is tracked and recorded in eFXplus Orders.

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Forex Weekly Outlook October 3-7

The third quarter ended with mixed moves in currencies. A full buildup to the US Non-Farm Payrolls, a rate decision in Australia and other figures fill the first week of the last quarter. These are the main events on forex calendar. Join us as we explore the market movers of this week.

While the final US GDP figure beat expectations[1], growth remained weak at 1.4%. Q3 seems better, but signals were mixed: Consumer confidence reached the highest level since 2007[2], but durable goods orders were unconvincing. Yellen’s testimony in Washington did not rock the boat. Elsewhere, worries about Deutsche Bank weighed on sentiment, but a tentative OPEC agreement[3] boosted oil prices and improved the mood. The US is in the limelight now. Let’s start:


  1. US ISM Manufacturing PMI: Monday, 14:00. The US manufacturing activity contracted in August to 49.4[4] from 52.6 in July. Only six of 18 industries reported economic growth, while Eleven industries reported contraction. The New orders index plunged to 49.1% from 56.9 in the prior month. The Production Index declined to 49.6% in August, down from 55.4% in July and the Employment Index registered 48.3% last month, down from 49.4% in July. The weakness may be attributed to the upcoming elections. Manufacturing PMI  is expected to reach 52.1 in September.
  2. Australian rate decision: Tuesday, 3:30. The Reserve Bank of Australia has kept the official cash rate on hold at 1.5%. After two rate cuts this year, the hold decision was widely anticipated. The central bank sees further rate cuts in 2017 but said it is too soon to determine the effects of the last rate cut on the market. Policy officials also noted the RBA’s adjustment of the interest rate is mainly a tool for restraining high inflation and are less sure of its other merits. No change in rates is expected this time. This is the first rate decision made by the new governor Philip Lowe.
  3. US ADP Non-Farm Employment Change: Wednesday, 12:15. ADP private sector payroll report showed job creation of 177,000 in August[5] compared to 179,000 in the previous month, broadly in line with expectations. This report is regarded as a kind of warm-up to government employment nonfarm figures expected on Friday. The ADP report is expected to show a 166,000 jobs gain in September.
  4. US ISM Non-Manufacturing PMI: Wednesday, 14:00. The Institute for Supply Management non-manufacturing index plunged in August to 51.4 from 55.5 in July. This was the lowest reading since February 2010[6] raising concerns over the overall economic outlook, cancelling expectations for a September rate hike. Business activity index fell to 51.8 from 59.3 in the prior month also still in expansion. New orders declined sharply to 51.4 from 60.3 in the previous month.11of the industries reported growth for the month, while seven reported a contraction. non-manufacturing activity is expected to reach 53.1 in September.
  5. US Crude Oil Inventories: Wednesday, 14:30. U.S. crude oil stocks continued their decline for the fourth straight week. Crude inventories fell 1.9 million barrels contrary to analysts’ expectations for an increase of 2.4 million bpd. The main reason for this drop is a significant decline in stocks on the East Coast.
  6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing first-time claims for unemployment benefits increased by 3,000 in the week ended Sept. 24 but remained at a low level indicating healthy labor market. The reading was better than the 260,00 forecast. The four-week moving average declined by 2,250 to 256,000. Initial jobless claims have now remained below 300,000 for 82 consecutive weeks indicating layoffs are as low as they have been in a long, long time. The number of new claims is expected to register 255,000 jobs gain this week.
  7. Canadian employment data: Friday, 12:30. Canadian job market has rebounded from its July plunge, gaining 26,200 jobs in August vs. a 31,200 contraction in July. However, despite the substantial jobs increase, the unemployment cate increased to 7% from 6.9% in July as more people entered the job force. Economists expected a smaller gain of 16,000 jobs and the unemployment rate to remain steady at 6.9%. Canada’s employment figures are volatile lacking a continuous trend. Therefore, the data cannot produce the meaningful amount of new jobs. Based on this jobs report the BOC decided to keep rates unchanged at 0.5%.
  8. US Non-Farm Payrolls: Friday, 12:30. Non-Farm Payrolls report in August showed a 151,000 gain[7] missing predictions for an 180,000 jobs addition. The unemployment rate remained unchanged at 4.9% while expected to decline to 4.8%. Wage growth inched up just 3 cents at an annualized pace of 2.4%. The positive side is that full-time jobs increased by 319,000, while part-time positions declined by 388,000. The number of new jobs in September is expected to be 171,000 while the unemployment rate is forecasted to remain at 4.9%. Wages are projected to rise by 0.2% m/m.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

*All times are GMT.

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