This Week's Top 3 FX Trading Opportunities

The U.S. dollar is trading slightly lower against most of the major currencies this morning, but this quiet start masks what should be another busy week in the FX market. The prospect of a later rate hike by the Federal Reserve is keeping pressure on U.S. rates and in turn the U.S. dollar. Concerns about global growth and the threat of Ebola continue to be on the forefront of everyone's minds and as long as that doesn't change, it will be difficult for the dollar to rally. However selling dollars is not the only potential trade this week - here are our top 5 opportunities:

#1 - Sell USD/JPY up to 108.

Despite all of the fears that slower global growth will spill over to the U.S., the Federal Reserve is on track to end Quantitative Easing next week. However just because the Fed will end QE doesn't mean that they are ready to raise interest rates. In fact, the biggest story last week was that policymakers joined investors in scaling back their view on when rates will rise and this shift in bias should make its way into the October FOMC statement. Given current market conditions, we expect the Fed to downplay the end of QE and the removal of stimulus. Therefore, we like staying short USD/JPY or selling with a stop above 108 on the premise that investors will position for a less hawkish FOMC statement as the week progresses. The GPIF's decision to increase the share of stocks in its portfolio should also attract foreign investment, creating demand for the Japanese Yen and more gas for our trade.

#2 - Buy the Canadian Dollar, Trade AUD on Chinese GDP

Considering that concerns about growth is driving currencies and equities, China's third quarter GDP report could set the tone for trading this week. On Friday, the Chinese government injected $32B into their banks, which could be their attempt to provide additional support ahead of weaker data. The changing competitive landscape and the government's focus on domestic policy has and should continue to slow Chinese growth. If Tuesday's GDP numbers surprise to the downside with annualized GDP growth hitting 7.2% or less, the commodity currencies will be hit hard with the Australian dollar leading the losses. The Australian dollar is best traded reactively on a break below 86 cents.

The Canadian dollar on the other hand can be bought immediately ahead of Wednesday's Bank of Canada rate decision. CAD has become deeply oversold because of the decline in oil prices but based on the uptick in job growth, increase in core prices and weakness of the exchange rate, the statement could be less dovish, leading to a much needed reversal in USD/CAD. Canada is widely expected to raise rates after the Fed and before the BoE which makes the CAD a bargain against not only the U.S. dollar but also the British pound and euro.

#3 - Sell Euro up to 1.30

Finally, the euro is in play this week with the ECB's covered bond buying program beginning this morning, the PMI reports scheduled for release on Thursday and the stress tests results due on October 26. The ECB's participation in the market is aimed at driving yields lower but instead we are seeing a significant increase in Italian, Spanish and Portuguese rates, reflecting investor skepticism and disappointment. Meanwhile given the recent deterioration in Eurozone data, we expect the PMI reports to show a further slowdown in economic activity. This coupled with concerns about the bank stress tests is why we find selling EUR/USD up to 1.30 an attractive trade.