Focus of the day:
"USD: Broad USD rally forming. Bullish.
We remain bullish on the USD against a broad range of currencies. USD strength is accelerating, driven by rising US yields. While shifts in front-end yields have the biggest impact on lower-yielding G10, a sustained rise in 10-year yields would lead USD strength to broaden out against high carry FX. Going into next week’s FOMC meeting, we think the risks are skewed toward a stronger USD. We continue to favour long USD against the low yielders: EUR, CHF and JPY.
EUR: EUR bearish, but sell at higher levels. Bearish.
We remain bearish on EUR/USD over the medium term but see a case for the EUR to benefit from markets as EUR short positions against the high yielders start to come under pressure, and these positions are closed. With the ECB providing more than the market was expecting, EUR/USD has fallen further since the meeting. Inflation remains low and activity data is weak. This week the attention will turn back to forward-looking indicators, for signs of growth in the region.
JPY: Expectations of BoJ Easing. Bearish.
We still like selling the JPY. We believe that the market is not pricing further easing from the BoJ – so if they do act, it could lead to further JPY weakness. Our economists expect further easing to be announced at the October meeting. Inflation expectations remain low and data continues to come in weak. With USD/JPY hitting 107, driven by both the US and Japanese side, we would expect the rally to continue, especially in an environment of rising US bond yields.
GBP: Surveying the Scots. Neutral.
The main focus for GBP will be on the upcoming Scottish Referendum, where polls show a very tight race between the ‘Yes’ and ‘No’ camps. A ‘Yes’ vote would result in a further decline in GBP/USD, as economic and political uncertainty would rise. A ‘No’ vote would likely drive a near-term rally as markets price out the political risk. Focus would then return to monetary policy, so the upcoming CPI and employment prints, as well as the BoE minutes, will be watched closely.
AUD: Vulnerable to rising US yields. Neutral.
Over the medium term we are becoming more cautious on the AUD. AUD/USD has fallen over 3% from its peak last week and should US yields and FX volatility continue to rise, the AUD is expected to stay under selling pressure. Despite stronger than expected jobs numbers, the increase was only part-time. This week we will be watching the RBA minutes. Previously the RBA has been concerned about the strength of the currency."