Goldman summarizes the key events in the coming week:
After many weeks of sluggish FX response to the risky asset weakness, last week finally marked a change. The trade weighted USD strengthened markedly, mainly on the back of a move relative to EM currencies. When looking in a more quantitative way at this development, we notice a rapidly rising beta when regressing changes in the trade weighted Dollar on changes in the SPX. For most of August and the first half of September, the beta was about 0.1, meaning a 10% decline in the SPX translated into a 1% rise in the trade weighted Dollar. This has now doubled where a 10% decline in stocks pushes the Dollar up by 2%. Not unexpectedly, therefore, we also got stopped out of our long-standing long EUR/$ recommendation.
This increase in FX sensitivity occurred against the backdrop of ongoing uncertainty regarding the Greek and Eurozone sovereign situation. The preliminary Eurozone PMIs last week indicated that the financial market jitters in recent months continue to put downside pressure on business sentiment.
Over the weekend, the G20/IMF/Worldbank meetings produced the expected stream of policymaker comments with most of the focus on the Eurozone. There is now considerable external pressure on Eurozone policymakers to finds ways to contain the crisis. As Huw Pill and Francesco Garzarelli have pointed out in two notes published on Sunday (September 25), despite much speculation, the likelihood for very fast action remains low. The ratification process of the July 21 summit agreement cannot be short-circuited.
In the upcoming week, debate and speculation about any “grand” Eurozone plan will certainly dominate FX markets and risk sentiment. We are cautious. On one hand, we continue to believe that USD downside pressures remain the dominating medium trend in FX, and hence the current rise in risk premia creates attractive opportunities to position for renewed US weakness. On the other, we still see plenty of Eurozone headline risk. For example, the tug-of-war over the next Greek tranche will likely continue for at least another 10 days. And important parliamentary votes are still outstanding in a number of EMU nations, in particular those with unclear majorities to implement the enhanced EFSF.
The second key development in FX markets will be the reaction of Asian central banks to the intense depreciation pressures. A number of EM central banks intervened in the second half of last week, and in the upcoming week markets will try to gauge the determination to intervene again to dampen or even block the sell off in many crosses, in particular in NJA.
Key macro data this week are business surveys, specifically the Chicago PMI and the German ifo. US durable good data is a timely activity indicator as well. Finally, we would have a look at Germany CPI data, as inflation trends in the Eurozone core could add to the multiple challenges faced by the ECB.
Key data points in the upcoming week:
Monday, September 26th: German Ifo
Tuesday 27th: US consumer sentiment, Richmond Fed index
Wednesday 28th: German CPI, US durable goods
Thursday 29th: US unemployment claims, UK consumer confidence
Friday 30th: Japan IP, Chicago PMI