We could be at an important junction that could determine the price action in the FX markets going into year-end. The IMF meetings of central bankers and finance professionals in the next few days should tell us more about what policy action will be taken to address the growing downside risks to global growth and inflation. We worry that the lack of stimulus plans, especially in China, could undermine the latest nascent recovery in risk sentiment and drag down G10 riskcorrelated and commodity currencies. Disappointing trade data out of China next week should strengthen investors’ defensive positioning.
Next week could prove pivotal for the policy divergence trade with important releases out of the US and the UK likely to determine whether the recent aggressive repricing of Fed and BoE rate hikes has been justified. We think that the US activity and inflation data as well as the UK inflation and labour market data will highlight that investors may have overreacted selling USD and GBP of late. At the same time, we think that data out of Japan should strengthen the case for more QE at the end of the month (CACIB’s central case) and weaken JPY.
Elsewhere, Australian labour data will attract attention, especially after the RBA kept an unchanged policy stance this week. Continuing uncertainty related to Asia may keep the risk of slowing conditions intact.
What we’re watching:
JPY – CACIB economists have front-loaded their call for BoJ QE to 30 October from January 2016. We revised our year-end forecast for USD/JPY higher to 125 from 123 previously.
USD – Better-than-expected data may bring expectations of the Fed considering higher rates this year back on the agenda.
GBP – Still constructive labour market conditions as reflected in next week’s data should prevent rate expectations from falling further.
AUD – Disappointing labour data should keep RBA rate expectations strongly capped. We remain in favour of selling AUD rallies.
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