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FX Technical Strategy

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Fed FOMC speakers will outnumber economic data reports next week

Fri, Oct 16 2009, 10:50 GMT
by Kenneth Broux

Lloyds TSB Financial Markets

Macro Outlook

USD weakness is still a dominant theme alongside the rally in the commodity and high yield currencies. Optimism surrounding US company earnings and widening interest rate differentials are playing a key part in the USD slide and with the Fed pledging to keep interest rates low, we see no prospect for a major reversal of bearish USD trend. For GBP, the jump in net short positions to the highest level since 1992 was proof of heavily oversold conditions. The subsequent short squeeze and reversal in GBP/USD and EUR/GBP could set the scene for further short-term GBP gains as the debate intensifies over the next BoE move on QE in November. This implies that sterling crosses are likely to be characterised by higher volatility over the next three weeks. MPC member Fisher hinted at a possible pause in QE and positioning ahead of the November BoE meeting could assist GBP to make up ground vs the USD towards 1.65. Disappointing UK Q3 GDP figures, however, could reinstate the bearish longer-term trend.

• USD

  Company earnings and interest rate considerations aside, net short USD positioning and quarterly IMF COFER data underscore the bearish dollar environment. A fall in USD funding requirements (see chart) and rising oil prices have also helped to depress USD support.
  

  Fed FOMC speakers will outnumber economic data reports next week, and may underline the mixed views with regard to expansion or extension of mortgage and/or agency backed securities. Chairman Bernanke will comment on the economy on Tuesday. The Beige Book is due on Wednesday. September existing homes sales and weekly claims will garner attention on the data side (continuing claims have dropped below 6mn).

• EUR

  ECB president Trichet’s effort to slow the ascent of EUR/USD has so far only had limited success as the cross makes progress above 1.49. A move up to 1.50 still looms over the short-term, based on heightened USD aversion and positive EU/US interest rate differentials.

  Weak euro zone data next week could mitigate the bullish set-up for EUR/USD. Support runs at 1.4760-1.48. Above 1.50, resistance is situated around the 1.5050-83 area. We have raised out target for the EU/US 2y benchmark spread to 50bps following the clearance of 42bps.

  Our 0.9400 target in EUR/GBP got hit earlier in the week. As outlined above, a possible pause in QE by the BoE could pull EUR/GBP towards 0.90. We still like EUR/GBP higher on a fundamental basis and the risks attached to UK imbalances. We look for EUR/GBP to hold above 0.90.

  Flash EU-16 PMI indices for October and the German September IFO survey will attract attention next week and may alleviate concerns that a strong EUR is detrimental to foreign demand. The manufacturing PMI is forecast to reach 50 , the watershed that separates expansion from contraction, for the first time since May 2008. The German IFO survey is forecast to have improved to 86.7, a 10-month high.

• GBP

  We favour being long sterling volatility over the next week as the market squares up to the MPC minutes and first estimate of Q3 GDP for clues on the BoE’s move in November. One-month vol in GBP/USD and EUR/GBP are trading at a two-month high. We think further upside lies ahead.
  
  

  From a short-term perspective, we like GBP higher especially vs the USD on interest rate differentials and the scope for GBP to catch-up vs other G10 currencies. We still favour selling GBP rallies vs commodity and high yielding currencies (AUD, NZD, CAD and NOK), and the EUR, however.

  The EU/UK 2y spread narrowed 8bps from the 58bps high but has been flat over the last two days. This supports our view that the correction from 0.9412 below 0.92 is overdone. We favour EUR/GBP to rebound above 0.92, though profit taking could emerge on positive UK Q3 GDP data.

  September M4 money supply (Tuesday) and retail sales (Thursday) data are due next week. Retail anecdotes for September were strong from the CBI distributive trades and BRC retail monitor and point to a potential positive surprise from the official ONS data (consensus +0.5% m/m). This supports our bullish GBP/USD stance going into the release of the first estimate of Q3 GDP on Friday (consensus +0.1% q/q). The parlous state of UK public finances is priced in and so we expect limited reaction to the September PSNCR and PSNCB data on Tuesday (PSNB consensus £15.0bn).

• JPY

  JPY strength has started to abate across the board and rising G7/Japan rate differentials could support upside momentum over the coming week. The underperformance of the Nikkei continues vs G10 benchmarks through October. Resistance to forex intervention has been repeated by Japanese officials.

  The move in USD/JPY above the 30th September high of 90.41 bodes well for additional near-term gains. Broad based JPY weakness has been observed vs G10 this week. A build-up of bearish momentum for the yen calls for USD/ JPY targets to be raised to 92.0.

  The BoJ policy meeting minutes are due on Monday. September trade figures are due on Thursday (consensus Y678.6bn surplus vs Y183.3bn)

• CAD

  Parity vs the USD only seems a matter of time as the Fed pledges to keep rates low, though the policy meeting at the Bank of Canada (BoC) next week urges for some caution. A relief bounce in GBP/CAD above 1.65 negates our 1.60 target. Short GBP covering may lift the cross closer to 1.70 ahead of key data releases and the Bank of Canada announcement.

  September CPI on Friday is forecast to show a fall to -0.9% y/y from -0.8%. Retail sales ex-autos are pencilled in to show a 0.5% m/m rise, though lower USD/CAD may have encouraged cross-border shopping.

  The BoC may try to slow the CAD’s ascent on Tuesday following the move below 1.03 in USD/CAD. We expect the target overnight rate to stay on hold at 0.25% and the Bank to reaffirm its intention to keep it there until Q2 2010.

• SEK
  

  Events in the Baltics have moved to the back burner following the visit of EC’s Almunia to Latvia. The threat of a Lat devaluation has faded and we now await the outcome of the budget debate in November.

  The SEK is underperforming against a range of G10 currencies except for GBP, JPY and the USD. For GBP/SEK, a spike above 11.30 on M&A talk (Vattenfall bid for EdF’s nuclear stake in Britain) marks a breakout of the fourweek range and puts the 50-day moving average (11.48) on the radar.

  For EUR/SEK, 10.3945 resistance has been in play since early August and looks set to finally give way. A dovish statement by the Riksbank next week favours targets being raised to 10.60-65. Support is situated at 10.28.

  Lower than expected September CPI justifies a dovish Riksbank statement on interest rates on Thursday. September unemployment data will be published on the same day. The jobless rate may rise back above 8%.

• NOK
  

  USD/NOK pierced 5.60 support and remains aligned with our near-term target of 5.50, supported by $77pb oil and the prospect of higher interest rates. Alongside the AUD, NZD and CAD, the NOK is well positioned to benefit from pro-risk currency flows. Due to a prospective widening in NO/ US interest differentials, we have lowered our USD/NOK target to 5.50. NOK/SEK looks toppy around 1.24 as NO/SE 2y spreads narrow.

  A quiet period ahead in terms of economic data until the Norges Bank rate meeting on October 28. We expect a 25bps hike to 1.50%. Governor Gjedrem speaks on October 22 at the annual meeting of Norwegian savings banks where the central bank’s intentions may offer clues for the monetary policy meeting in the week after next.

  Substantial purchases of foreign currencies for the Petroleum Fund next year are unlikely. The 2010 Budget released this week shows a FX surplus from State Direct Financial Interests exceeding Petroleum Fund forex requirements. This may underpin the NOK over the medium-term.

• AUD
  

  Code from the RBA to flag interest rate hikes has evolved from ‘in due course’ to ‘not being timid’. Under the latest remarks by RBA governor Stevens, we assume that another rate hike in November is now extremely likely . The overnight cash rate may hit 3.75% by year-end.

  Our AUD/USD target of 0.9250 is looking increasingly conservative, and a 50bps hike next month would clearly argue for a rally to 0.95. We stick to our GBP/AUD target range of 1.71-1.72 range, though admit this could be too aggressive if the BoE halts QE next month. AU/UK 2y benchmark spread hits a new high at 392bps.

  Key data releases and events over the next week include a speech by RBA assistant governor Lowe (Monday), the RBA minutes of the October meeting (Tuesday) and September new vehicle sales (Wednesday).

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Published on  Fri, Oct 16 2009, 11:33 GMT