Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk
FX Week Ahead - Fast money algos stretch the limits again, time for redress
A common feature of the currency markets these days is to push the established themes and narratives as far they can be, and at a time when the USD is suffering on all fronts, fast money accounts are using thin market conditions to their advantage. Friday's price action emphasised this completely, as all it took was the absence of policy talk from Fed chair Yellen at Jackson Hole to set off another hit on the USD, pushing the index (DXY) back to the recent lows.
Naturally, EUR/USD has been leading the way, and for all the talk that the market has overrun the response to the unavoidable adjustment in current ECB policy measures to come, we continue to push higher again with an unrelenting quest to get to 1.2000. When the ECB minutes revealed the governing council's view on the FX 'overshoot'. we saw a sharp hit down to 1.1660, but since then, the bid tone has been strong as ever. We hit levels a little shy of 1.1940 late Friday, with president Draghi also refusing to speak on matters policy or market related.
Will we see 1.2000 next week? More to the point; would we stay up here for long? Yield differentials have seen little change in recent weeks, with Bunds and Treasuries moving largely in tandem of late, largely to the broader challenges on risk sentiment
Elsewhere, we saw USD/JPY pulled back towards 109.00 again, but there is a clear reluctance to push back into the mid 108.00's given the strong demand seen here. We continue to see the tight correlations with equities here, but despite concurring with the view that stocks are vastly overpriced, yield seekers will buy the dip here as they do on the Dow and S&P.
However, irrespective of what the central bankers say or don't say, we can focus on the data next week, with a plethora of US stats to work through. The odds of another hike in the Fed funds rate this year have dropped to a little shy of 35%, which is not too different to what we saw at the start of last week, but we are looking for this to re-calibrate back to 50% and pull the USD up a little (again) with it.
The highlight of the week will be the payrolls report on the Friday, but what is different this time is that the ISM manufacturing PMIs are released later that day. The employment index has been offering up a good indication of how the headline number will play out, with the midweek ADP survey too erratic to base projections on. ADPs will pale into insignificance anyway, with Q2 GDP on the agenda at the usual 08.30 slot (NY time) that day. Wages are in focus as ever, so the income and spending numbers on Thursday along with the PCE will also draw reaction.
In Europe, we can mention yet more inflation readings including the EU wide number, but along with French GDP, German unemployment and EU sentiment indices, we can see little to dampen sentiment in the single currency region until the next ECB meeting, which is now some 10 days or so away (7 Sep).
There is still room for EUR/CHF to benefit from this positive sentiment, and this would fit in with what we expect to play out in the USD next week. USD/CHF broke lower, taking out the weekly range base, but holding off the recent lows, a fresh recovery process remains on cards - data permitting.
In the commodity currencies, focus on USD/CAD as we push back into the mid 1.2400's again, but just as we have seen the EUR appreciating at an aggressive pace, the CAD has gained all of 10% in the space of 10 weeks, so the corrective moves may not be over. Longer term, we expect to see 1.2000 and below in this pair, but as is a familiar theme in these reports, there seems to be little consideration for time-frame, and indeed concurrent markets.
This is less so the case here with Oil arguably at more comfortable levels - in relative terms, but we are also looking at some of the rate pricing for the BoC to be reined in a little, with the market carried away with the bullish stance at the central bank. They meet again on Wednesday week (04 Sep), so we'll see if they maintain the same level of positivity in their rhetoric. Q2 GDP is the data focus for the week to come, with Canadian payrolls not released until the following Friday. Until then, we watch 1.2410-15. If this does not hold, 1.2330-00 is the next support zone of note.
If the USD does push up off this level, then we may be looking at some interesting levels for USD bulls against the AUD and NZD. Industrial metals have taken off aggressively, with Copper prices rally to $3.00 on fresh anticipated demand out of China. Not quite sure where this sudden optimism has come from, but we will get some reaction to the China PMIs midweek - the official survey on Wednesday and Caixin on Thursday.
In Australia, the CapEx data for Q2 on Wednesday is the stand out release of note, while we also get the Q2 construction stats which will all set the tone for the GDP release. AIG manufacturing PMIs are also due out for. For NZ, the Q2 terms of trade lone data focus ahead. AUD in the driving seat now that the cross rate has broken higher, but ahead of 1.1000, there are more risks for longs to contend with in the week ahead.
Little of note in the UK apart from the August bank holiday on Monday, but for the Pound, much will depend on how EUR/GBP continues to perform at these heady heights. Now that the market is back 'in tune' with Brexit uncertainty - and it took the BoE to remind traders of this (!), GBP is a sell on rallies. Though it is hard to argue against this, we see better opportunities against the USD than the EUR at these levels, though we do not discount a push up towards 1.3000 again perhaps even a little higher with the UK Brexit papers suggesting a little more give on from the PM May's team.
Manufacturing PMIs are out on Friday in the UK, but services are the major focal point here. The manufacturing surveys get more attention in Norway and Sweden, with we get the August results at the end of the week. Still no breakout in NOK/SEK, but we are starting to see the NOK threatening a little more.