Key Events This Week: November 16th – 21th:
Monday: USD US Industrial Production
Tuesday: GBP Consumer Price Index EUR ZEW Survey USD US TIC flows
Wednesday: JPY BOJ Meeting USD FOMC Meeting Minutes
Thursday: EUR Eurozone Manufacturing USD US Consumer Price Index
Friday: CAD Consumer Price Index
USD Index
While we maintain our bullish USD view over the medium term, we would highlight the risk of a near term corrective setback on seasonal position adjustment. Hence, we now recommend caution with USD long positions for the next few weeks. However, over the medium term, we believe that USD should benefit from the growth in the US economy being stronger than the rest of the world. This week we will be watching FOMC minutes and the US CPI as potential catalysts for next USD directional move.
Disinflationary risks remain high in the Eurozone but the tone of EUR over the coming week may be set by the release of 3Q GDP. With Germany and France narrowly missing recession level prints, there are risks of a near term technical rebound, given that EUR short positioning continues to register extreme levels. Market remain bearish over the medium term as structural flows are expected to remain unsupportive.
The political situation in Japan has developed over the past week, with speculation on a snap election expected by the end of the year and consideration of delays in the sales tax hike. The Nikkei continues to push higher, providing USD/JPY with some support; however, caution is advised on long USD/JPY positions at the moment. JPY positions were flat ahead of the BOJ meeting, suggesting that USD/JPY positions are fresh, so any position unwinding ahead or post Sales Tax/Elections news could be swift and have a sizeable impact USD/JPY.
The Bank of England’s inflation forecast was dovish, perhaps somewhat more so than markets expected. The central bank acknowledged a high risk that inflation falls below 1%Y, and hinted that a first hike is unlikely before 4Q15. This has weighed on GBP. As a result, the upcoming inflation print and BoE minutes are likely to be closely watched for affirmation of the news from the Inflation Report. Weak construction data at the end of the week took GBP to new lows on Friday.
Falling commodity prices and expected weak growth in China support our bearish view on the Australian economy. The RBA is maintaining its bearish rhetoric against AUD, with Kent repeating that AUD remains overvalued and that the RBA would not rule out intervention. While a mild dollar correction could lead to a higher AUD, we believe that this would be short lived and provide better entry levels for shorts.