FX October 01, 2021 / 04:27 am UTC

FX Daily Strategy - Europe, October 1st

By Adrian Schmidt

US ISM and PCE data may take a back seat to debt ceiling and infrastructure bill focus

Upbeat Tankan helped USD/JPY to top out

EUR weakness may be end of month and positioning related

USD/CAD rejecting levels above 1.28

US ISM and PCE data may take a back seat to debt ceiling and infrastructure bill focus

Upbeat Tankan helped USD/JPY to top out

EUR weakness may be end of month and positioning related

USD/CAD rejecting levels above 1.28


Friday sees some significant US data in the shape of the ISM survey and the PCE price index for August, although the market seems more focused on the debt ceiling and the infrastructure bill at the moment. We expect a marginally weaker ISM manufacturing index of 59.5 in September, down from 59.9 in August, though details are likely to be mixed as are signals from other surveys. There may be more interest in the core PCE price index. We expect the core PCE price index to increase by 0.2%, not quite as weak as a 0.1% rise in the core CPI. This is in line with market expectations and would maintain the y/y rate at 3.6%, so would probably have little impact. Only much stronger numbers, which would lead to talk of accelerated tapering, seem likely to have much market impact. Weaker numbers would probably not have much effect on markets.


The quarterly Tankan survey from Japan showed that the confidence among large manufacturers unexpectedly improved for a fifth straight quarter, possibly due to their overseas exposure. Sentiment among small firms and non-manufacturers remained under pressure from virus-containment measures. While USD/JPY topped out, market impact was still limited both because the market pays little attention to Japanese data and because COVID restrictions have now been eased and Japan's emergency lifted. USD/JPY did manage to hold below the big 112.23 resistance level on Thursday, with the USD general seeing some correction lower (except against the EUR), perhaps helped by reports that the government shutdown would be avoided. However, the underlying USD tone remains firm and while these seem excessively high USD levels in real terms, especially against the JPY, further rises in US yields due to tapering expectations could yet see a break higher. We doubt that debt ceiling concerns will prove particularly significant, and if they do emerge as a factor, ought really to have a significant risk negative impact and benefit the JPY as much or more than the USD.

In Europe we have final September PMIs and Eurozone CPI, but neither are likely to have much impact as the Eurozone numbers should be well flagged by the component country CPIs already released, and the final PMIs are well predicted by the provisional numbers. It was notable on Thursday that the EUR suffered general weakness, falling on the crosses as most other currencies recovered against the USD. This may have related to end of month flow, or to cross flows. EUR/GBP corrected lower, in part because of better than expected UK Q2 GDP, while we continue to see a case for EUR/JPY to move lower, as it has looked overvalued for some time in relation to its normal correlation with risk premia. The weakness of EUR/USD itself looks in part positioning related, as the long held speculative long positions evident in the IMM data have been steadily unwound as the basis for the 2020 rally has faded, but the case for a much lower EUR/USD on the basis of Fed tapering still looks weak with 10 year yield spreads barely moving in the USD’s favour, in contrast to the 2013 taper tantrum. While it remains hard to oppose USD strength given recent price action, we would be wary of jumping on the bandwagon, particularly at the beginning of a new quarter. 


USD/CAD was notably weak towards the European close on Thursday, even though the oil price was generally soft through the session. We still see the CAD as having medium and long term potential for gains against the USD, with yield spreads suggesting plenty of potential downside. While it remains vulnerable to risk negative events, the highs above 1.28 have been rejected several times in recent months, and as long as the global recovery is expected to continue, the CAD, helped by a fairly hawkish BoC, should be one of the better performers. 


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I, Adrian Schmidt, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.