The ECB's Balance of Payments data is out later. In theory, these numbers should have been a positive for the euro, but they clearly haven't. We think ‘hot money' or short-term money market flows explain a lot.


USD: Will the US slowdown spread to the consumer?

Events this week (Trump, Powell, trade) have triggered a slight flattening of the US yield curve, but also slightly softer US rates across the board. The story for risk assets remains benign, however, where many central bankers are becoming more comfortable on policy settings (Mexico was the latest to cut last night) and investors seem more comfortable about the path for growth. These views can probably accommodate a further, gentle slowing of the US economy and today we'll receive an important input about the health of the US consumer. After a 0.3% month-on-month decline in September, October retail sales are expected to rebound 0.2% MoM. We do see some downside risks here, but suspect that any dollar weakness will be felt more against the high yielders than the euro or Japanese yen.


EUR: ECB data today will provide insights on short term flows

EUR/USD realised volatility continues to sink – one year historic volatility is now near 5.50% - as this pair is becoming somewhat of a side-show. Driving that we believe are the negative rates in Europe, which is making the case for the euro as a preferred funding currency. We had addressed that issue in an article we published in early October. That same article focused on ‘hot money' outflows from the eurozone, which were largely unwinding the euro positives of the eurozone's large current account surplus. We argued these short term outflows had been worth up to €350 billion over the last 12 months. Look out for an update on these figures today, when the ECB releases Balance of Payments data for September. Unless US retail sales collapse today, expect EUR/USD to trade a 1.0990-1.1060 range.


GBP: Focusing on Labour's manifesto

The election focus shifts to Labour's manifesto, which will be launched tomorrow. Cable is holding up well, despite Labour's intention to nationalise a big chunk of BT Group in order to provide broadband support to all. Let's see how this plays out in the FTSE – but little reaction so far may reflect the market's lack of concern over Labour's election prospects. Cable to 1.2920.


CHF: Surprising strength

We have been surprised by the sharp fall in EUR/CHF this week. Yes, global yield curves have flattened a little on uncertainty over the trade deal, but we are far from seeing a generalised ‘risk-off' environment. While we made a case for EUR/CHF to be trading at 1.05 back in July, more recently EUR/CHF has seemed comfortable trading at 1.10. We wonder whether this week could be seeing some pre-hedging of CHF liabilities by Polish banks in relation to their local mortgage challenges, where outstanding Polish FX mortgages are around the PLN130 billion or CHF30 billion area. Our Polish team feels that hedging activity will be spread over a long period as court cases are spread out (i.e. no single class-action court ruling), but this is a story that bears watching into year-end.


Read the original analysis: FX Daily: ‘Hot money’ update from the ECB

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