Credit Agricole

  • According to our FX positioning gauge, the EUR was sold for most ofthe last week. Although net-long positioning remains elevated, it is nowfully in line with its medium-term average. Hence, short-termpositioning as it stands does not classify the single currency as tradingin overbought territory anymore. From that angle, it cannot be excludedthat major such as EUR//USD will stabilise more meaningfully again.
  • This is especially true as USD positioning has been broadly balanced oflate with more unstable risk sentiment in recent weeks only havinglimited impact on positioning. This also means that the currency faceslow position squaring-related risks in the very short term and ahead ofUS general elections.
  • Turning to the GBP, last week saw rising buying interest with realmoney investors driving most of that development. This appears to beon the back somewhat lower no-deal Brexit fears and reducedexpectations regarding the BoE considering cutting rates into negativeterritory anytime soon.
  • With positioning as it stands, fresh buying/selling interest is needed inorder to trigger any sustained trend. While we do not exclude that theGBP could stay under pressure in the short term, we doubt such adevelopment would extend into a more sustained downtrend. This isespecially true, should upcoming trade talks produce abreakthrough and/or the Commons take steps to curb the mostcontroversial aspects of the Internal Market Bill before the vote onthe bill tomorrow, which would help the currency to regain groundmore broadly.

ING Bank

  • USD: The highlight of the week ahead will undoubtedly be the first presidential TV debate taking place in Cleveland on Tuesday night. Biden goes into the debate with around a 7% lead in opinion polls and will face a stern test from President Trump – typically a strong performer in events like these. FX markets in Asia Wednesday morning may be the first litmus test of how the dollar will fare in the run-up to the election. One school of thought is that a strong Trump performance is equity positive/dollar negative. We have the view, were Biden to win, the dollar could decline in 2021 on a benign world view – but let’s look out for the price action on Wednesday.
  • In terms of the US macro calendar, we’ll receive more insights into the US jobs market via the September ADP and nonfarm payroll releases. We are slightly sub consensus on the NFP (we’re at +850k) which could add to the sense that the recovery is stalling. We’ll also hear from a variety of Federal Reserve speakers. Most recently the unified call from the Fed for more fiscal easing has been taken as equity negative/$ positive. Thus focus increasingly switches to Congress and whether Nancy Pelosi and Steve Mnuchin can find a path for fresh stimulus. We would not chase the dollar higher from these levels and doubt investors would want to increase dollar exposure into a possibly contested Presidential election.
  • EUR: Away from US politics, markets have surprisingly been pricing in more rate cuts from the European Central Bank. Money market futures now fully price a 10 basis point rate cut by September 2021. We doubt the ECB would want to go this route – more like an extension to the Pandemic Emergency Purchase Programme or Public Sector Purchase Programme in December – but this week may have some bearing on the discussion. Wednesday sees both the flash eurozone September CPI and the ECB and Its Watchers conference. Another soft core CPI figure (expected at 0.4% year-on-year) could keep rate cut expectations alive and the ECB event could also see more reference to vigilance over the strong EUR. Wednesday looks like it will be a busy day in FX markets!
  • Elsewhere, Tuesday sees eurozone economic confidence figures for September. The overall index is expected to rise a little further, but investors will be watching the growing divergence between the industrial and services sectors – the latter starting to be hit by broader lockdowns. Speculative long EUR positions remain at risk during the current test of market confidence, but we suspect good demand will be found in EUR/USD near 1.16.
  • GBP: GBP has been relatively immune to the fall in risk sentiment, with GBP/USD largely tracking the EUR/USD decline (while EUR/GBP has been flat). What currently matters more for GBP is the idiosyncratic driver of the UK-EU trade negotiations outlook. With the easing in rhetoric from both sides, GBP has been therefore stable vs the EUR despite the falling markets. Nonetheless, given the roughly 50:50 chance of deal vs no deal, we continue to see GBP as inadequately priced for the risk presented, with limited risk premium built into GBP. We thus see risks to GBP on the downside.
  • Chancellor Rishi Sunak’s new wage-subsidy plan has contributed to keeping GBP supported, but it is of a secondary importance to the Brexit outlook. So should the domestic data points next week, with the main focus being on September PMI Manufacturing (Thursday).
  • JPY: As discussed last week, USD/JPY has spent very little time below 105 over the last five years (barring crises) and the recent jump from 104 is consistent with this pattern. The move could be consistent with the 15bp rise in real US yields since late August – largely as the equity sell-off has dragged US inflation expectations lower. But we suspect as well that Japanese fund managers are waiting in the wings to diversify into US assets when they see USD/JPY sub 105.
  • That said, USD/JPY looks to be a key vehicle to hedge US Presidential election risk and as the debates begin, USD/JPY could start to take a front seat. The highlight of the Japanese data calendar will be the 3Q Tankan. Having dropped precipitously in 2Q, a decent bounce back is expected – consistent with the Bank of Japan having recently revised up its economic outlook. A further decline, if seen, in USD/CNY should also help USD/JPY lower – especially if Chinese PMI and industrial profit data remain encouraging.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.