AUD, NZD: Fade Rallies As Risk Aversion Likely To Pickup In December – TD

The Australian and New Zealand dollars struggled during the month of November and could continue enduring pressure in the last month of 2016:

Here is their view, courtesy of eFXnews:

The chart below shows our proxy for macro hedge fund positioning. It suggests that macro funds are short oil currencies but long high-beta currencies like AUD and NZD. It also indicates that they are short low-yielding currencies, notably EUR, CHF, and JPY. Our positioning indicator is reaching levels where the news flows can trigger squeezes.

For one, we think an OPEC deal will boost oil-linked currencies like CAD and NOK, though we prefer the latter on a knee-jerk oil pop.

We also suspect that barring some immediate downside risks into the Italian referendum much of the bad news is priced into the EUR in the near-term.

We also like fading the rallies in AUD and NZD, as risk aversion is likely to pickup in December. This reflects the seasonal bounce in FX volatility, stretched valuation, and ongoing political uncertainty across the majors that also benefit JPY.

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USD/JPY: On Escape Velocity Toward 120 – BofA Merrill

Although we believed 2016 would be a year of yen appreciation, we saw it as corrective strength. While things have gone both right and wrong, our main points are largely unchanged. We believe JPY’s weakness has resumed and will manifest into 2017. We expect USD/JPY to rise to 120 – when currency diplomacy will become a serious concern.

Risk reward has shifted from yen buying to yen selling. Multiple forces supported the outlook for a stronger yen this year, but the strongest argument was positioning. Potential USD/JPY buyers almost dried up, while potential sellers accumulated. Of course, whether the yen would appreciate depended on the global macro environment, but the positional skew showed that in terms of potential price range and probabilities, the risk/reward balance was better for yen buying than for yen selling. However, we believe this state of affairs reversed this summer.

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Return of policy divergence. Rising interest rates in the US are pulling up global rates, but the JGB market has largely managed to insulate itself. As such, spreads between foreign and yen rates have widened across the board. In the environment of rising foreign interest rates, the Bank of Japan’s yield curve control amplifies its impact on the currency market as long as it remains credible.

Reflation policies continue to be the political tactic. Political incentive to create a better economic environment before a possible snap election – as early as early next year – suggests the probability of fiscal expansion is not low. The BoJ can counter the upward pressure on yields from potential fiscal easing. This could lead to higher inflation expectations and lower real interest rates.

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Bullish technical picture. Technical analysis shows USD/JPY made a triple bottom pattern in 3Q16 and began an uptrend in 4Q16. Measured move analysis from the November 2016 trend line break suggests USD/JPY will initially reach 116.48. We also think there is potential for USD/JPY to retest previously important technical levels in 2017 such as 121.15, 123.75 and cannot yet rule out the 2015 highs of 125.85.

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OPEC Deal: First Reaction On Targets For WTI Oil Prices – Danske

The Organisation of Petroleum Exporting Countries (OPEC) has just announced that it has agreed to reduce production following weeks of negotiations finalised at its meeting in Vienna today. OPEC will aim to lower output to 32.5mb/d by 1 January 2017. The deal is contingent on non-OPEC producers cutting production by 600kb/d. According to OPEC Russia has already committed to delivering 300kb/d in cuts. OPEC will have a meeting with non-OPEC producers to finalise this on 9 December. Indonesia, which is a net oil importer, suspended its membership. However, this does not affect the size of the output cut. Iran has been exempted from reducing output and allowed a small rise in crude production from current levels. The monitoring of output cuts will be based on secondary sources. OPEC will publish a table on individual members’ output targets. The deal is set to be reviewed at the next meeting on 25 May 2017.

The lack of real commitment from OPEC today (deal is contingent on meeting with nonOPEC producers) highlights that present conditions make it difficult for OPEC to succeed as a cartel. OPEC’s position on the oil market is under pressure from the emergence of alternative fuel sources, large shale-oil reserves in, e.g. the US, staggering world oil demand under pressure from weak global economic growth and a strong dollar and finally lack of compliance within OPEC. If OPEC manages to get more countries on board, i.e. effectively expanding the cartel, it will, however, get a firmer grip on the oil market. We, probably along with the oil market, will await the deal’s actual implementation. The failed attempts at a deal over the past year as well as the fragile state of public finances in most OPEC member countries mean that the oil market is likely to test OPEC compliance with the deal. Hence, if it is implemented it may push oil prices a bit higher.

The price of Brent crude has climbed to around USD50/bl on the deal, which in the big picture is a quite muted response. The reaction has been greater at the front end of the Brent crude forward curve, thus leading to a narrowing of the contango by about 2% on a 1Y horizon. This reaction may reflect either a lack of confidence in the longevity of this deal or an expectation that it will lead to higher output from, e.g. US shale producers, partly offsetting the effect of the output cut. Nevertheless, we look for oil prices to head higher in 2017. This is based on our expectation of higher global economic growth and inflation, in particular in the US economy, the world’s leading oil consumer, which should support growth in oil demand. In one year’s time, we also look for the USD to trade at a lower level than today, which supports a higher oil price. We expect the price of Brent crude to rise to USD58/bl.

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OPEC Deal: First Reaction On Targets For WTI Oil Prices – CIBC

It appeared that Saudi Arabia was taking a different tact to managing it’s oil production after the meeting in Algiers, and we got the confirmation today. News from Vienna outlines that OPEC has agreed to cut production to the bottom of the end of the previously suggested range, with a 1.2 mn bbl/day reduction set to drop the groups production to 32.5 mn bbl/day. Non-OPEC contries–namely Russia–could also curtail production by another 0.6 mn bbl/day. As we had written before, this brings forward the timeline for a balance in the physical crude market, accelerating the drawdown in elevated commercial inventories.

We are sticking with our call for an average for WTI prices of $53/bbl for next year, and for $58/bbl for 2018, which had factored in an OPEC cut.

It’s worth noting that US shale oil will still be the marginal source of crude over the next several years, and breakevens there could–if anything–be influenced lower by lighter regulatory constraints under the Trump administration.

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GBP: Sterling Is Cheap But Not Cheap Enough: Where To Target? – Deutsche Bank

We have revised our year-end GBP forecast higher but maintain our fundamentally bearish view for next year, based on asymmetric growth risks, subsiding capital inflows and political uncertainty.

The solid data to date, and the expected inflation pass-through from depreciation this year, reduce the prospect of further Bank of England easing, but is unlikely to shift them to a more hawkish stance given the downside risks to growth. Our focus is on political risks related to Brexit crystallizing next year. We see the recent High Court ruling—likely to be upheld by the Supreme Court–as raising the likelihood of a general election next year. While this need not raise the odds of a “hard” Brexit, the delay to the triggering of Article 50 will prolong uncertainty and weigh on investment. We also expect continued deterioration in capital inflows to put significant pressure on the UK’s broad basic balance, while depreciation does little to boost the trade surplus.

Sterling is cheap, but not cheap enough to attract inflows amid significant growth and political risks.

DB targets GBP/USD at 1.14, 1.12, 1.09, and 1.06 by the end of Q1, Q2, Q3, and Q4 of 2017 respectively. 

DB’s forecasts last updated on eFXplus on Nov 25. 

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USD/JPY: Correction Imminent; Time To Fade The Rally – Barclays

The recent yield­-driven USD rally since the US election appears extended as we see limited scope for further uptrend in UST yields without more policy clarity. While president­-elect Trump’s fiscal policy stimulus is expected to boost growth from late 2017, the US economy is poised to decelerate into H1 17 due to tightening financial conditions and potential negative effects from antiglobalization policies, such as tariffs on China and Mexico, in our view.

Amid such backdrop, we have pushed back our forecast for the next Fed hike in 2017 (after one hike in December 16) to September from June. In terms of longer­-end UST rates, our forecast of 10y UST yields stand at 2.25% in Q1 and 2.40% in Q2­Q4, suggesting that further near­-term yield­driven USD appreciation should be limited. Amid the post­-election USD rally, the JPY has underperformed almost all major currencies except a few EMs, such as MXN.

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Consequently, the JPY NEER has declined nearly 6% in three weeks (Figure 1). The pace of the post­-election USDJPY rally (month­todate) is the fastest since November 2014 following the BoJ’s QQE expansion and the GPIF announcement of its portfolio rebalancing plan. There have been three main drivers of JPY’s underperformance: 1) yield differentials: the main driver of the post-­election move, in our view, with BoJ’s yield curve control (YCC) reinforcing US­Japan yield differential widening by keeping JGBs relatively immune from global bond selloff; 2) risk dynamics: supportive of JPY weakness despite tightening financial conditions by reducing safe­-haven demand for the JPY; and 3) positioning: accelerator of the move with a rapid unwinding of speculative JPY long positions, which seems to have largely run its course. In fact, CFTC non-­commercial net long JPY positions have already been mostly unwound (Figure 2).

All three factors have contributed to a rapid USDJPY rally with the pair now trading more than 2 standard deviations overvalued according to our FFV model, suggesting that a near­term correction is likely imminent.

B54.PNG

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EUR/USD: Only Limited Short-Covering Bounces At This Stage – SocGen

With wider yield differentials relative to Bunds than we’ve seen for 27 years, Presidential ire alone won’t turn EUR/USD down, for example.

So far this week I’ve met (French) clients who are convinced that any thoughts of Marine Le Pen being the next French President is absurd, and ones who think it’s likely. The FT this morning assuring me that President Hollande wants to stand for re-election, and whatever the final result, chances are Ms. le Pen will have the most votes after a first round in which the main candidates on both the left and right wings are diluted by outliers.

I can’t see how the Euro stages more than short-covering bounces before then. And more immediately, unless the Italian referendum delivers an unexpected ‘yes’ vote, I can’t see anything but thoroughly muddy political waters in Europe generally.

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CAD: Fade Knee-Jerk Rally On OPEC Headlines – TD

We do not see much in today’s Canadian GDP report to alter the BoC’s dovish tone. For now, the repricing of US growth and inflation risks are enough to pressure USDCAD higher even if the BoC stays on hold next year.

Oil prices have recently buttressed CAD but we note rate spreads point to a move above 1.35.

This leaves us fading the knee-jerk rally on OPEC headlines with strong USDCAD support seen near 1.3325.

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NZD/USD: Short Attractive Trade To Position For A Risk-Off Correction – BNPP

Broad USD momentum appears to have slowed and it makes sense to anticipate price action to become more two-way, even as significant USD pullbacks are likely to encounter eager buyers.

One of our favourite trade to play USD strength remains to short NZDUSD, targeting 0.68*. We think that NZDUSD is a more attractive trade to position for a risk off correction in the global equity market.

In its semi-annual financial stability report, the RBNZ stressed once again concerns over the housing market. The market interpreted it as reducing the chances of further RBNZ easing. However, the reaction was limited as they suggested some macro prudential measures that offer scope to cut rates if necessary.

*This trade is recorded ineFXplus Orders.

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November made the dollar great again – coming to an end? [Video]

A busy end to an excellent month for the US dollar awaits us. Consolidation is the name of the game for now, but this may not last too long. The OPEC meeting is left, front and center, but many other events lurk: the NFP buildup, the Italian referendum and more.

Video wrap-up of the morning show for November 30th 2016:

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