Focus of the day:
EUR: More Weakness to Come. Bearish.
EUR is likely to remain an underperformer in the current environment. Monetary divergence between the ECB and the Fed should keep the currency under pressure. The main risk to our EUR view would be a selloff in risk into the first Fed hike. This would likely drive some repatriation and funding unwinds, which would support EUR given its funding status. Overall, we maintain our bearish view.
JPY: Gains on Crosses Likely. Bullish.
,JPY may weaken against USD into the first Fed hike, but we are much more upbeat on the currency on crosses, and even against USD over the medium term. The central bank has pushed back the timing of its 2% inflation target, buying time before it needs to implement further easing. In addition, we believe the government may help the central bank by increasing fiscal stimulus, which would be JPY positive.
GBP: Bearish Risks Rising. Bearish.
The new dovish tone from the BoE, fiscal tightening and a looming Brexit debate could keep GBP under selling pressure for now. GBP/USD remains sensitive to global risk appetite and rate differentials. Core inflation rising last month is not enough to support GBP we believe and like to sell on rallies. This week we will be watching the GDP and business investment data for any signs of slowing, indicating heightened Brexit concerns.
CHF: Long USD/CHF. Bearish.
USD/CHF is rapidly approaching its 1.0240 high before the removal of the EUR/CHF floor in January. We believe that the upside momentum in this pair will continue at least until the ECB meeting in December. Aggressive ECB policy in December may support the SNB cutting rates further in coming months if it sees a risk to EUR/CHF falling too fast. The SNB’s Jordan has emphasized the need to keep monetary policy divergences to weaken the franc.
CAD: Time to Go Short. Bearish.
We remain bearish on CAD. The fall in oil prices seen recently will have a lasting negative impact on the economy, and the central bank may need to respond. Indeed, the rebound seen in the non-commodity sector is fizzling out, evident in manufacturing data and non-commodity exports. With further easing not priced in as of yet, the currency could weaken if the BoC is forced to take a more dovish tone in the future. We enter a long USD/CAD position.
AUD: AUD Tactically a Regional Outperformer. Bearish.
AUD could see some tactical strength in the current environment, particularly against its commodity currency peers. The RBA painted a more encouraging picture on growth, arguing the fall in mining investment could be nearing an end, and that prospects for economic improvement have improved slightly. However, the central bank sounded more concerned about external factors and inflation, which will keep AUD a relative, not absolute, outperformer.