FX Weekly Preview: All Eyes On Yellen, Trump And The Yield Curve

Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk

Looking to the week ahead, we have the FOMC meeting midweek, and for all the expectations that there will no change this time around, the market will be sensitive - to the downside - on any rhetoric in the statement which puts Dec in doubt.  This looks unlikely as the Fed are keen to press on with normalisation, and with the market now well prepped for a move, it would be a pretty dovish sign if Yellen and Co did not 'take advantage'.  From 2018 on however, we can see that there is scepticism over whether 3 more rate hikes can be accommodated, the base-line case for up to 2 hikes of 25bps reflected in the 5-10yr Treasuries.  For some reason, there was key resistance at 2.40% in the 10yr, but we saw the psychological draw of 2.50% more likely, and this latter level has held firm, and we expect to do so into the Fed announcement, if not longer. 

Policy reform in the US has clearly stuttered - badly - and even if this is revived, questions over how the Trump administration plan to fund tax cuts in particular are not going to go away, and this will also rein in USD strength from here.  Looking over the past 12 months, the Trump reflated trade saw Treasuries topping out at 2.65% in the 10yr - twice - and this was when long run rates were assumed to be closer to 3.0%.  The Fed themselves have marked this down to 2.75-2.80%, so this adds further substance to 2.50% as a key top.  

For Trump himself, Robert Mueller's US/Russian election probe has now led to the first charges being filed by the special counsel, and according to some of the leading news wires, anyone charged could be taken into custody as soon as Monday.  He is also set to name the new Fed chair, which looks increasingly like Jerome Powell who errs on the side of Yellen in the gradual approach to normalisation.

USD/JPY resistance in the 114.25-50 area aligns with the above rates scenario but may see a gap lower on the Russian probe news, but on the weekly charts, a push above 114.50 would run into more (tech-based) selling in the 115.00-50 area, so we attach a high probability to this pair having reached some notable limits unless the US data continues to outperform - recall, Q3 hit 3.0% on Friday.  At the end of the week we have the Oct employment report which is expected to show a rebound in headline jobs after the hurricane hit south hit jobs growth to the tune of (only) 33k.  The headline number is expect to show in excess of 200k this time, with wage growth again in focus.  

At the start of the week we also have personal spending and income and the core PCE, while accompanying Wednesday's usual ADP survey, we also have ISM manufacturing PMIs for Oct and construction spending leading up to the FOMC climax that evening.  ISM services come out after the jobs report on Friday, so it will be busy week for the spot rates, with policy intentions and economic data all crowded into one week.  

Early Tuesday sees the BoJ deliver their latest musings on the economy, and followed up by a widely anticipated continuation of their stimulus measures which will remain in place until inflation picks up.  Abe's win underpins the current fiscal and monetary stance, but the domestic data is showing gradual recovery.  Pre election divestment from Japanese fund managers are not going to give JPY shorts any further momentum on the downside, and in the case of the likes of EUR/JPY in particular, ECB policy and political unrest across the region could reinforce a down side bias here in the short term.  

Thursday's ECB meeting was met with disappointment, but it is not as if this was not foreseen. The governing council have been hinting at gradual adjustment, if only to curb the EUR effect. Traders continued to support EUR/USD and the rest of the crosses into the announcement, but with the reduced APP effectively open ended, buyers had to throw the towel in, and the lead spot rate dropped under 1.1660 and later 1.1600.  

Looking to the stand off between Spain and Catalonia, we have seen limited concerns in the price action, and given the weekend rally in support of unity, this relaxed approach looks to have been justified for now.  Overall unrest in most member states - France, under Le Pen, the AfD in Germany and Kurz and his courting of the far right Freedom Party - does anything but paint a picture of stability.  It will not be long before Italy is in the spotlight, and we have already seen Lombardy and Veneto seeking greater autonomy.  

Suddenly the EUR bulls are not so confident, and calls for fair value at 1.2500 in EUR/USD have also gone quiet.  Circa 1.1500 looks set to be tested, but we would not be surprised to see the coming weeks and months producing levels back in the 1.1100-1.1300 range, especially after such aggressive buying over the summer.  EUR/CHF will likely follow lower to some degree, with the SNB open about their intentions to 'smooth out' CHF strength.  

Date focus will be on Tuesday preliminary inflation reading for Oct, where the headline rate is expected to slip from 1.5% to 1.4% while the core rate sticks at 1.1%.  Q3 GDP is released at the same time with median forecasts looking for another 0.6% rise. 

A big week for the BoE, who have been hinting at a 25bp rate hike and the market taking this to heart despite the obvious concerns over EU negotiations. As we see it, the MPC's hands are tied, and if they do not move this month, governor Carney in particular will come under fire given many believe his conviction is lacking, turning swiftly from dove to hawk over late summer.  The gov has also admitted that there is a trade off between growth and inflation, so he looks to have been swayed by the consensus moving in favour of a hike. Others at the BoE including McCafferty, Saunders and Broadbent seem to think the economy is on the cusp of a tightening cycle, but the data is already showing cracks.  

Last week's Q3 GDP print of 0.4% (beating 0.3% expected) was little to get excited about, but Cable went on another surge higher, only to be snuffed out again, but sub 1.3100 is proving resilient and looks set to contain the downside until the decision on Thursday.  Probability lies with a one off hike at best at the present time, and in this instance, any post move reaction is likely to be faded - 1.3250-60 again to slow gains, coming in ahead of the 1.3300 level, 1.3340-50 is strong, but the higher we go the more intense the selling will get.  We just cannot see where the momentum on the upside will come from unless the UK government buckle in the negotiations and given in to EU demands to commit to the exit payment before trade talks.  Even then, single market access isn't going to come cheap. For us, the only soft Brexit is no Brexit, and the hard liners in parliament will not allow that to happen! 

In Canada, the BoC's gov Poloz and his deputy Wilkins again put the market straight on rate policy going forward.  In another example of overstretching, or reading more into forward guidance, the central bank has clearly been unnerved by the rapid pace of appreciation in the currency, as well as long end rates, but we have seen a decent moderation in USD/CAD tipping 1.2900 on Friday from the mid 1.2000's seen in early Sep.  Data dependency is not something which is heeded in a market hell-bent of volatility and/or momentum, but this week, we get the employment stats alongside that of the US, but closer in, the GDP figures for Aug are also released. Gov Poloz is again speaking this week, and his comments may reflect on the growth numbers from Tuesday's session.  

1.2900-1.3000 is a strong area of resistance which we anticipated would hold in the near term at least, and Friday's price action saw just that with the strong US data only able to push this USD pair as far as 1.2915-20 - we finished the session just above 1.2800. 

In Australia, it was the inflation miss which saw the AUD under-perform, losing ground against the NZD which is plagued by the prospects of a less business friendly approach to governance by the new Labour led coalition.  At 1.8%, both the headline and trimmed mean rates are slipping away from the RBA's 2-3% target range, but if tightening labour markets in the other major economies are to augur well for a pick in asset prices, then I don't see why Australia should be excluded. Support seen ahead of 0.7600 in the spot rate was largely USD based, so with AUD/NZD in particular ending the week near the lows, we expect rate hike expectations have been pushed out a little, so there may be some further weakness to suffer here.  Retail sales and trade are the stand out releases ahead. 

Labour stats for Q3 are the key focus in NZ, and with the new PM reforming the RBNZ mandate to incorporate targeting full employment, their are dovish implications going forward, and these could be emphasised by any weakness in the numbers.  Unemployment currently stands at 4.8% at however, which compares favourably with Australia at 5.5%.  Employment in NZ is expected to have risen around 0.7% over the quarter.  In the meantime, NZD/USD based out at 0.6815-20, matching levels seen in May this year, and this may form a near term base for now - 0.6680-0.6700 next if we haven't.  

Looking at the SEK and NOK vs the USD and EUR respectively, we continue to see near identical patterns, and there looks to be little interest to differentiate here with Norwegian data dipping a little but the Riksbank refusing to let go of their cautious stance.  We are still keeping half any eye in the NOK/SEK rate which has moved back into the mid 1.0200's again, and there is little key data ahead which could jolt the cross rate to any material degree.  

Manufacturing PMIs in both countries out on Wednesday.  

In Switzerland, the KoF Leading indicators are on Monday, but all data here has lost its relevance with the SNB sticking to task and watching the CHF like a hawk.  USD/CHF through parity again suits their cause.