Early FX

October 31st, 2016 5:53 am | by John Jansen |

Via Kit Juckes at SocGen:


With a little over a week to go until the US Presidential Election, it’s no surprise that politics is set to play an even bigger role in markets in the coming days. This morning, rather than creating the sort of Halloween ‘fright night’ that would suit the tabloids, it’s creating the same sort of fog over markets that made getting to work in London scarier than usual. This is what London was always like in black and while pre-EEC films, isn’t it?                                                                                              The announcement at the end of last week that the FBI is taking a new look at Hillary Clinton’s emails appears to have boosted Donald Trump in weekend opinion polls and has left markets in an uncertain mood this morning. That the Mexican Peso and Brazilian real sit at the top of the October FX performance table tells us the market has been getting comfortable with the idea of a Clinton presidency and suggests some wobbles head for risk sentiment.

Last week’s CFTC data show overall dollar longs being cut back a bit, yet the dollar’s trade-weighted value continues to rise (slowly). Over October as a whole, the dollar has out-performed the rest of the G10 currencies, as well as the Yuan, but by last week the picture was just a lot more blurred, with the Euro topping the G10 table, the Swedish Krona, Yen and Canadian dollar at the bottom and the dollar in the middle. Still, if dollar longs aren’t excessive yet and as long as the upward crawl in Treasury yields remains intact, we’ll stick with dollar bullish trades and views. 10year Treasuries are up 8bp on the last week, 25bp over the last month. Only half of that rise is due to real yields moving up (the other half’s down to higher breakeven inflation), but that’s enough to keep the dollar on track, though it could do with some more ‘real’ help.

CFTC USD longs have stopped growing


We still prefer dollar, longs against the yen to longs vs. the Euro. EUR/USD looks like drifting down to 1.08 or so, but we’re still worried about how much Euro softness depends on the ECB crowding private sector investors out of European bonds and the Euro. We’ve written about how tapering of bond purchases could trigger a Euro bounce, but more broadly, a weaker currency was one of the major channels by which ECB policy has worked but if the Euro is now just range-trading and the ECB has virtually run out of ammunition, then we struggle to see a catalyst for another significantly lower.

The dollar could do with more real yield help…


By contrast, there are still lots of yen longs lout there to squeeze as US rate expectations rise and B OJ policy is well-designed to help yield differentials widen in the favour of the dollar as long as the upward crawl in treasury yields goes on. The only concern is risk sentiment more broadly – I couldn’t make a credible case for Yen softness on a trump win…

The FT reports that BOE Governor Mark Carney has told friends he is planning to stay on for his full term. That’s stopped the rot for sterling, for now. From here, the test comes from the data, and whether it goes on holding up as well as it has been. If (as seems likely) we see a series of somewhat soggier data releases form here onwards starting with this week’s PMIS, sterling will struggle to rally very far, but will probably see volatility leach out of the market. We retain a bearish bias, but maybe with fewer thrills.

There’s a lot of data and news due this week in general. The first highlight comes from tomorrow’s RBA announcement, where of 27 forecasters, 21 see no changed and 6 (including SG) see a 25bp cut. The FOMC meets on Wednesday and presumably does nothing other than tee up a December hike, and the BOE meets and releases the Inflation Report is due Thursday. The US also releases ISM data tomorrow and non-farm payrolls on Friday. Another 200k increase in jobs would surely lock in the much-anticipated December hike, but any pick-up in wage growth would also keep the Treasury yield uptrend intact. And that’s what keeps a bullish dollar bias intact amid all the political noise.

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