FX October 05, 2020 / 04:30 am UTC

FX Weekly Outlook & Strategy, Europe October 5th-9th

By Adrian Schmidt

Expect risk negative bias as Trump, COVID, and the lack of a US fiscal package dampen sentiment

JPY to be preferred as a safe haven

GBP sentiment looks too optimistic about Johnson/von der Leyen meeting

AUD downside risks on RBA

Strategy for the week ahead


Expect risk negative bias as Trump, COVID, and the lack of a US fiscal package dampen sentiment

JPY to be preferred as a safe haven

GBP sentiment looks too optimistic about Johnson/von der Leyen meeting

AUD downside risks on RBA



Speculation about the impact of Trump catching COVID is likely to continue through the week, but it is difficult to reach any clear conclusions about market impact at this stage. Still, we would favour a risk negative bias on the week if only because of the increased uncertainty. Clearly the health risks for Trump are significant, but we are unlikely to know how badly he has been affected for some days and potentially much longer. But in the background the lack of a fiscal package doesn’t help the risk tone either, and while some speculate that a deal might be more likely to be made after the Trump news, it doesn’t seem that anything is imminent. 


We would therefore favour a mild risk negative bias, and the JPY would remain our favoured currency. While the USD also managed some gains on Friday, it is hard to see the USD as the favoured safe haven when the risk concerns are centred on the US political scene. USD/JPY still looks toppy above 105.50, but continues to struggle to make real progress below 105, so we wouldn’t expect sharp JPY gains without some clear news. But we continue to see scope for JPY gains on the crosses as well as against the USD, especially in risk negative scenarios. 

The most volatile currency in the last week was GBP, which saw sharp swings on various news around the UK/EU trade talks. The initial reaction this week will be to any news out of the Johnson/von der Leyen video call on Saturday. We suspect the market is rather too optimistic about the prospect of progress in this call, with the optimism shown in the EUR/GBP drop below 0.9050 on Friday. Von der Leyen played down the optimism on Friday saying that the most difficult aspects of the talks are “completely open” despite progress made in some other areas. 

For a breakthrough to be made, it seems likely that one side or the other would need to make major concessions, and we just don’t see that as being on the cards at the moment. Markets remember the Johnson meeting with Irish PM Varadkar last year which paved the way for the Withdrawal Agreement, and anticipate something similar. But the situation is different.

Johnson has much less to gain this time from capitulation to the EU. While the announcement of a deal last year was a springboard to “getting Brexit done” and a Conservative election win, there is no immediate political benefit from getting a deal this time. In addition, a deal which involves acceding to EU demands on a level playing field will not go down well with the ERG wing of the Conservatives, and could undermine Johnson’s status as leader and effective majority. 


While there are economic benefits to securing a deal, these are less substantial than many think, with much of the damage to the economy already done by the decision to leave the EU. So while a deal could mitigate the damage, a deal which limits UK freedom on State Aid and gives up fishing rights is unlikely to be seen as a win when the economy will in any case still be suffering – from COVID as well as Brexit. A thin deal (the maximum the UK Govt appears to want) will be disruptive. A lot of things which were easy (as a result of EU level rules), will become more difficult. Why compromise, why 'sell out' (by compromising with the EU), why antagonise much of your Parliamentary party, just in order to get a deal which manifestly fails to deliver on what you have been promising? 

From the EU perspective, another Varadkar moment also makes much less sense given that the UK has subsequently decided that it might not abide by that agreement after all. Trust and goodwill are lacking. And while Varadkar was the sensible point of contact last time, given the centrality of Ireland to the problems, the current negotiation is stuck on much more EU wide issues which von der Leyen doesn’t really have the authority to decide on without major consultation with the Council of Ministers. 

The rhetoric arising from the meeting could well be confusing, but we doubt there is the political will for sufficient compromise, so see GBP risks as mainly on the downside.

The RBA meeting is another focus this week. The AUD has remained quite resilient in recent weeks, though it has not really shown much sensitivity to domestic policy, rather just moving in line with equity markets. We don’t expect any change of policy from the RBA at this meeting, so the AUD will probably continue to focus on global factors. But there is some risk that they hint at the possibility of a cut in November at this meeting, and this could detach the AUD from its close relationship with equities. This risks from the meeting seem to be on the downside, and we would also see the global risks as on the downside, so a move to the bottom half of the 0.70-72 range may be seen.


Data and events for the week ahead


US 

The US data calendar is very light putting focus on Fed speakers, and Wednesday’s FOMC minutes from the September 16 meeting. Fed speakers have mostly taken a cautious tone on the outlook despite noting stronger than expected recent data that saw near term forecasts revised higher. However there are likely to be some differences on opinion visible in the minutes, Williams recently sounding quite positive while Rosengren said he was more pessimistic than many of his colleagues. The dissents from Kaplan and Kashkari, respectively less and more dovish than the majority view, will be discussed. Kaplan’s view that the Fed needs flexibility on rates did get mentioned in comments from the normally dovish Evans, so his concerns are likely to see some discussion.


There is plenty of Fed talk scheduled, most notably Powell speaking to the NABE on Tuesday. Also due are Evans and Bostic on Monday, and on Tuesday Harker again, Bostic and Kaplan. Wednesday sees Kashkari, Bostic and Kaplan speak on racism, while Williams and Evans are also due. 


The most significant data release is Monday’s September ISM non-manufacturing index, where expect a modest slowing to 56.0 from 56.9. On Tuesday we expect a wider August trade deficit of $66.6bn from $63.6bn in July. Also due are August consumer credit on Wednesday, weekly initial claims on Thursday and August wholesale data on Friday. 


Canada

Canada sees August trade data on Tuesday, September’s Ivey PMI on Wednesday and September housing starts in Thursday. The most significant release comes on Friday when we expect a slower but still strong 150k increase in September employment with unemployment falling to 9.7% from 10.2%. 



Japan


A relatively quiet week ahead is seen with no top tier data. 

Friday will bring August labor cash earnings and household spending data. Earlier jobless numbers suggested that labor market slackened further in August, with unemployment rate rising to 3.0% and job-to-applicant ratio down to 1.04 in August. Labor cash earnings are expected to continue declining, with consensus expecting -1.2% y/y in August. 


Eurozone

The final reading of the Services and Composite PMI for September will be released on Monday, alongside the August retail sales data and the sentix investor confidence index.

ECB’s Lagarde and Lane speak on Tuesday while Schnabel joins BoE’s Bailey in a panel discussion on Thursday, with De Cos also speaking on the same day.


Germany

The final reading of the Services and Composite PMI for September will be released on Monday.

Tuesday will offer the August factory orders figures. We expect factory orders to increase further in August by 3.4% m/m, bringing the volume up to a level that is 3.5% lower than a year earlier compared to 7% lower in July.


On Wednesday it’s the turn of August production. We expect a further 3% m/m rise, bringing the output level up to 7.5% below that of a year earlier compared to 10% below in July.


As for France, balance of payments and trade data is out next week, on Thursday.


UK

Economic data may continue to take a back seat as politics dominate market thinking, especially as the UK government’s self-imposed Brexit deadline if Oct 15 looms more discernibly.  But there is high-profile data, most notably on Friday in the form of August GDP numbers. We envisage a further rise in the monthly GDP numbers for August, with the 3.3% m/m projection thereby being the fourth in a row, albeit still leaving output down some 9% in y/y terms and done similarly from the peak last set in February.  This August rise would be smaller than the two preceding increases but would also still be broad-based, albeit with less momentum coming from what has hitherto been a relatively strong construction recovery.

As for the BoE, the Financial Policy Committee Summary and Record from its meeting on 30 September 2020 will be published on 8 October 2020 at 10:30 and will assess the outlook for financial stability by identifying the risks faced by the financial system and weighing these against the resilience of the system.

But even with this August presumed rise of 3.3% m/m, a circa-19% q/q jump in Q3 which is what the BoE envisages (at least in its MPR) does look overly-optimistic, albeit far from impossible: at this juncture we are now penciling in a circa-17% q/q rise, albeit one likely to give way to a more anemic 3.5% Q4 rise with the outlook into 2021 made all the more opaque by the latest Brexit shenanigans and fresh mobility restrictions coming into play.

The week, however, begins on Monday with final services PMI data which we expect will see little revision, although car registration data due the same day may offer a further gloomy insight in the consumer backdrop.  Unit labor cost and productivity data for Q2 (Wed) are likely to be difficult reading, although data for the later may not be too bad given that the slump in output in Q2 was largely matched by a slump in hours worked.


Switzerland

There is little major data this coming week save for jobless data (Thu) and Wednesday’s monthly FX data from the SNB which showed a drop in Jul and then little change in August.  NB the SNB has just announced that in respect to foreign exchange market operations, the volume of which has hitherto been communicated annually in its accountability report, in terms of the volume of interventions will now be disclosed at the end of each quarter for the previous quarter


Australia

The Reserve Bank of Australia (RBA) will meet on Tuesday to make key policy decisions. While we are not expecting any policy changes, there will be increased interest this time round following RBA Deputy Governor Debelle’s recent speech on further easing. The speech represents a more proactive RBA , and while we do not expect policy changes in this meeting, we acknowledged that there is now a modest chance that the RBA could act. We also think that the case for easing at the November meeting is now a close call. Also on Tuesday, August trade balance data is due and the market is expecting a wider trade surplus. Alongside the trade data, ANZ job ads for September will be due.


Sweden

The major event this week will be business production and orders numbers for August, numbers that should confirm a hefty Q3 bounce is in the offing but where momentum into the current quarter may be ebbing.  Otherwise, household consumption data (Fri) may confirm a less upbeat recovery backdrop.


Norway

A pretty full on week. Watch out for the August industrial production figures on Wednesday and the August real GDP data on Thursday. Then on Friday, it’s the turn of the September inflation data.


France

The final reading of the Services and Composite PMI for September will be released on Monday.


The August balance of payment and trade data is then out on Wednesday and on Friday we expect to see that French industrial production to improved further in August, rising by 2.5% m/m and bringing the overall level of output to 5% below that of a year earlier, up from -8.3% in July.


Italy

The Services and Composite PMI for September will be released on Monday.

On Wednesday, we expect to see a decent rebound in retail sales for August after the 2.2% m/m drop in July amid the late start of the sales season. 


On Friday, amid positive survey data, we see Italian industrial production rising a little further in August by 2.2% m/m, bringing the output to be some 5% below that of a year earlier, up from -8% in July.


Spain

Other than the Services and Composite PMI for September that will be released on Monday, the only highlight is the August industrial production data on Wednesday.


Highlights from the last week


Optimism on US stimulus undermined USD and JPY, but…

… strong risk negative reaction to Trump COVID test 

Risker currencies reaped the most benefits

GBP choppy on mixed Brexit headlines


Even though the US fiscal stimulus package struggled for a breakthrough, the market continued to look on the bright side. G10 FX performance saw a preference towards the risker currencies. Some of the changes were partially corrected on Friday, after Trump was tested positive for COVID, which led to a fairly steep risk-off reaction across markets amid the uncertainty surrounding his campaign.

While the US stimulus packages expectedly passed the House, talks between Pelosi and Mnuchin failed to yield a breakthrough on Thursday. The prospect of passage in the Senate still looks bleak. The US presidential debate was heated and messy, and thus lacked proper discussions. Betting markets saw Biden slightly extending his advantage on the debate and Trump COVID results. Market impact was mixed and modest on the debate. USD/JPY only moved meaningfully away from 105.50 on Friday to test 105.00 on Trump COVID results.

Eurozone inflation


EUR/USD bounced higher into the 1.17 handle with a generally positive risk tone. The EUR dipped on Wednesday following comments from Lagarde who said the ECB could decide that periods when inflation is too low need to be compensated by times of faster price growth, and vice versa, under its ongoing strategic review. This mirrors the Fed’s AIT approach, and while it may not make much difference to policy in practice, it is dovish at the margin.

EUR/GBP saw very choppy price action around 0.91 while GBP/USD was lifted on risk. Amid the final round of UK/EU trade negotiations this week, there was plenty of volatility surrounding GBP. EU officials continued to indicate that there was still a lot of distance between the sides on state aid rules, while UK officials were briefing that the talks had identified a “landing zone” for state aid and that fisheries were now the main sticking point. The EU decision to bring legal action against the UK for the Internal Market Bill (IMB) also had a negative GBP impact, but was not really unexpected and of limited near term significance, as the legal process will likely be overtaken by the news on a trade deal. The announcement of Johnson meeting with von der Leyen on Saturday was taken as a GBP positive. BoE Bailey suggesting serious consideration of negative rates was a negative for GBP.


With October RBA easing expectations diminishing and strong equity performance, AUD strengthened against all the G10 currencies except the Scandis. AUD/USD rose from the bottom of the 0.70-0.72 to the top of it before risk-squaring on Friday corrected some of the gains. NZD/USD pared some of the late September sell-off, now back above 0.66. While USD/CAD fell, CAD lagged the other commodity currencies.

Weaker than expected retail sales in Sweden and Norway was incapable of displacing the Scandis as top performers this week. EUR/NOK fell from a 4-month high, returned below the 11 big figure even with oil prices on the softer side. EUR/SEK also slipped from its 4-month peak. EUR/CHF was little changed around 1.08.


Data generally had lesser interest this week. US consumer confidence rose strongly in September, back above 100 for the first time since March, though still well short of pre-COVID levels. US GDP revised up and pending home sales hitting fresh highs. US PMI and ISM were a little on the weak side of expectations, although the ISM employment index was on the strong side. Initial and continuing claims were lower than expected. US personal income was a little weaker but consumption a little st


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