Trade Of The Week
Currency investors should consider selling GBP/JPY this week, advises CitiFX in its weekly FX pick to clients.
"Sell GBP/JPY at 130.55, target 127.10, stop loss 132.60," Citi advises.
*Citi weekly trades provide short term guidance on where they see 1-2 week opportunities in G10 FX markets. Unless Citi explicitly extends them, they will be closed out automatically at COB the second Friday after they are introduced.
Week Ahead: US Elections Casting A Long Shadow; What's The Trade?
Growing political uncertainty ahead of the US presidential election has already been weighing on USD across the board, consistent with FX price action ahead of US presidential elections spanning the last 40 years. Despite Clinton’s lead slipping in the polls of late,we think that the Democratic candidate will have a sufficient number of electoral votes to secure a victory, however.
The outcome will be supportive for USD and risk sentiment, and negative for the safe haven EUR and JPY if only because the uncertainty associated with a Trump presidency abates. FX volatility could subside as a result as well. We feel fairly comfortable in calling for renewed upside in AUD/JPY from here.
While not our central scenario, a Trump victory represents a nonnegligible tail risk and a reason for investors to remain very cautious at the start of the next week. We suspect that a surprise win of the Republican candidate will bring to the fore fears about rampant US protectionism and economic uncertainty, at least initially. This should weigh on risk and USD and support EUR and JPY as well as FX vols.
A smorgasbord of data releases and a central bank meeting are on offer next week. We suspect, however, that investors will focus on the releases only once the outcome of the US election is known and presumably only if Clinton is the new US president. We expect the RBNZ to cut rates but doubt that it will flag the beginning of a new easing cycle. A ‘one and done’ cut may not be enough to keep NZD down if risk appetite recovers in the wake of the US election, however.
Domestic activity data out of the Eurozone and Japan may play only a secondary role, especially if investors’ demand for USD returns in the wake of the US election. Evidence that the Chinese FX reserves have dropped more than expected in October could rekindle bets on growing demand for USD-funding, and weigh on EUR and JPY against USD once again. GBP’s bounce on the back of abating ‘hard Brexit’ fears could be put to the test ahead of the industrial production data next week.
We believe that the latest build-up in US crude inventories is only the beginning of a more sustained correction, consistent with a wellestablished seasonal pattern. Oil prices could thus extend their losses, and continue to hurt CAD and NOK. The latter could also struggle if Norwegian inflation were to surprise on the downside again next week.
Barclays Trade Of The Week: Clinton - Long USD/JPY; Trump - Long USD/MXN
Currency investors should consider buying USD/JPY on a Clinton win, or buying USD/MXN on a Trump win, advises Barclays Capital in its weekly FX pick to clients.
"We think a Clinton victory would be positive for global risk and weaken traditional safe haven currencies. We find the JPY to be one of the most sensitive currencies to changes in the subjective probability of a Trump win and would expect a USDJPY rally following a Clinton win.
On the other hand, USDMXN would likely see material appreciation in the case of a Trump victory, which could take the cross up to 22. The MXN is the most sensitive currency to the US elections, and the anti-trade and anti-immigration rhetoric of Trump would have negative effects on the economy if his more extreme policies were to be implemented; the market is likely to treat the US elections as a binary event and trade on the assumption of the worst policy outcome for Mexico," Barclays says as a rationale behind this call.
Buy USD/CAD Dips Near 1.133 Targeting 1.35
The focus today turns squarely on the US election. Our Trading the Election piece, highlights all our views across different asset classes.
...Given the movements in the different G10 proxies, we also wanted to measure the currencies that look most over/undervalued against our high-frequency models. Recall that we expect the USD to rally on a Clinton victory since this is likely to remove the of the risk premium recently injected into the USD. This also keeps a December Fed hike on the table. The third chart shows our G10 relative value models, derived from our estimates of high frequency fair value.
As FX Trends Return, Best Trade Is To Follow USD/CHF Higher
After the US election surprise, the rise in treasury yields on expectations of fiscal stimulus has led to strengthening of dollar across G10 currency pairs which has held to a rise in trendiness across G10 pairs.
Among G10 currencies, USD/CHF is our top technical currency pair. The pair is highly trending as per VHF metrics and has broken new ground to the upside. The cross is the least stretched among G10 currency pairs from a RSI perspective and has smooth price action as measured by realized vol.
EUR/USD is also trending and is breaking new ground (100 percentile) but it is relatively stretched as per RSI metrics.
Similarly USD/JPY, EUR/GBP and USD/CAD are trending according to VHF metrics and breaking new ground but are highly stretched from an RSI perspective.
USD/CAD: Buy Dips Targeting 1.37; USD/JPY: Fade Rallies Above 110
The 20-rolling correlation to USDCAD is around –0.3 so it also provides a bit of diversification from USDCAD.
For USDCAD, we prefer to use any washouts in positioning to re-enter news longs. Indeed, our model looks for a move to 1.37 so we think dips will be shallow and short.
Furthermore, we think it is time to fade the move in JPY. Positioning indicators show extreme JPY shorts and it also looks a bit stretched on our valuation metrics.
For the week ahead, we like fading rallies above 110. With EURJPY trading at the top-end of the range, we also like shorting this ahead of the ECB meeting in two weeks. Brexit and the US election have probably made markets more cautious about election risks, favouring more downside in EUR in the G10.
Long USD/CHF Is The Best Long USD Trade; Buy Dips Into 0.9990
Our model, macro and technical scores are heavily biased in the USD’s favour for another week.
Yield fuelled USD gains are likely extend into the Italian referendum (4 Dec), ECB (8 Dec) and FOMC (14 Dec), though some caution warranted over the potential for a replay of Dec 2015 which saw decent USD gains into the ECB and the Fed and a post-event reversal: the ECB could underwhelm on QE extension and the Fed likely delivers a (fully priced) “dovish” hike.
USD weakness likely to be brief though given various other tailwinds: 1) another potential HIA; 2) a more hawkish composition to the Fed’s Board when Trump fills two vacancies; and 3) “EMU break-up tail risks” due to 2017 European election
CHF remains our favoured currency to position for USD strength, our model, technical and macro scores summing to an aggressive -8, a strong cue to buy USD/CHF on weakness. We lift our buy level in USD/CHF to 0.9990, with a stop at 0.9890.
EUR/USD: Watch For These 3 'Subplots' This Week
In 2015-2016, real yield differentials correlate better than nominal ones and in the last few weeks the Euro has under-performed these as the trend in peripheral spread in European bond markets has once again become important. Which gives the EUR/USD story three separate subplots this week.
Firstly, the resounding victory of Francois Fillon in the second round of the French Republican Primary installs him as front-runner for the Presidential election next year, with polls suggesting he would win a second round run-off against Marine Le pen. That’s helping the Euro but the focus will now be on the independent candidates who may emerge, in particular Francois Bayrou from the centre-left. If he were to dilute the right-wing vote enough, and the leftwing were to field a credible candidate, M Fillon’s passage to a second round run-off wouldn’t be as clear cut as the polls currently suggest.
The second sub-plot is the Italian constitutional reform referendum this weekend. BTP/Bund spreads are close to their wides as the implications of a possible ‘no’ votes are debated. New elections are unlikely and the most recent opinion poll suggests only 15% of Italians want to leave the Euro, but the FT warns of the threat of a ‘no’ vote to Italian banks, and there are concerns about implications for the country’s credit rating, too.
The third sub-plot is much more mundane but on Friday we can get back to the US labour market. We look for another 165k increase in non-farm-employment, a 4.8% unemployment rate and 2.8% wage growth. Consistent with a December rate hike but a familiar story all the same and one that leaves us thinking that well over 90% of the widening trend in Treasuries/Bunds is already behind us.
Further EUR/USD weakness will be much more about European politics than the relative growth trends.
Cross Of The Week: Sell EUR/GBP Into Next Week
In the UK, the government appeal to the Supreme Court on Brexit will open on 5 December – but the ruling won’t be revealed until early next year. While political uncertainty in the UK remains elevated post-Brexit, the economy has performed surprisingly well - with growth at a solid above-trend 0.5% quarterly pace in Q3.
The GBP remains vulnerable to political events. However, with solid growth; the BoE firmly on hold; and with no major policy events in the near-future - the pound looks cheap at current levels.
Meanwhile, in the euro area policy uncertainty looks set to rise – especially if the ‘no’ camp should prevail at the Italian referendum. In addition to that, ECB President Draghi is largely expected to announce an extension of QE at the next ECB meeting (on 8 December) which could add to downward momentum for the euro.
GBP at the moment looks like good value and, if investors’ sentiment towards the euro area deteriorates, we think EURGBP could weaken further from current levels.
USD/JPY, GBP/USD: Trading USD Trend & GBP Correctio
We think FX investors should differentiate between the trend and the correction. The USD is within a secular uptrend driven by relative return differentials which themselves find their foundation in a global output gap differential.
Hence any USD setback should be regarded as welcome to add to USD longs. This applies especially for our main call suggesting a medium term USDJPY target of 130 or higher. Mondays 111.35 USDJPY low should now limit the downside
Japan equityin flows= Weaker JPY. When plotting the performance of DM and EM local equity markets in the last 6 weeks vs the performance of their currencies vs the USD, we find a nice inverse relationship. This makes sense as a strong equity market is often a sign of local economic growth potential and equity market inflows from foreigners. However, there is one outlier, the JPY, which has weakened at the same time as receiving equity inflows. Analysis from our QDS team taking data from the Tokyo Stock Exchange shows that cumulative Foreigner equity positioning was only 56% of previous peak exposure, suggesting further upside here. The BoJ's Sakurai said yesterday the BoJ will continue to provide a stubborn effort across a wide front to escape deflation, which includes buying lots of JGBs and continuing fiscal spending. The Nikkei is reporting that Japan is considering issuing more deficit bonds to cover the tax shortfall. Even if issuance increases,yields are expected to be capped by the BoJ, keeping the yield differential wide and supporting USDJPY. Japan's life insurers also continue to exhibit strong demand for USD assets despite a widening USDJPY basis. The chart below shows that their hedge ratios are too high and the adjustment process will limit and JPY upside
Our more constructive GBP outlook is paying early dividends as the UK government appears to takes a more realistic position in respect of maintaining access to the common market. Yesterday, Brexit Minister Davis suggested the UK would consider paying for EMU market access. Even if his comments were not a new line from the conservative party (May's speech at the party conference said an end to contributions was not a red line), the FX markets were more optimistic after a similar line came from EU side. Dutch Finance Minister Dijsselbloem, who is also president of the Eurogroup, suggested that the EU could design a way for the UK to enter the internal market but it would not be as easy or cheap as it is now. GBP longs towards 1.30 offer a good opportunity to weather any short term USD setback.
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Currency investors should consider selling GBP/JPY this week, advises CitiFX in its weekly FX pick to clients.
"Sell GBP/JPY at 130.55, target 127.10, stop loss 132.60," Citi advises.
*Citi weekly trades provide short term guidance on where they see 1-2 week opportunities in G10 FX markets. Unless Citi explicitly extends them, they will be closed out automatically at COB the second Friday after they are introduced.
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