G10 FX Week Ahead: November strain

• The frequency of market-moving data releases is going to be much lower in the coming week. Only retail sales and German industrial production (both for September) are on the eurozone agenda while the ISM Non-Manufacturing and the University of Michigan sentiment index will be in the spotlight for the US. The ISM read will likely be pivotal as markets hope to cement their expectations that the Fed will stay put in December; a clear rebound in the gauge will be needed to dissipate fears that the slowdown in manufacturing has expanded to the service sector. Our economists see the risk of a weaker-than-expected read that may revive some expectations for a December cut (with the latest ISM manufacturing indicating a recession in the sector and keeping the case for a cut in place).
• Markets will also await more details on trade talks and on President Trump’s impeachment process. The latter may continue to have a quite limited market impact, whereas a number of sticky points (as well as a timetable, after the APEC meeting got cancelled) are still to be outlined in the “phase-one” US-China trade deal. We still see the risk of markets having misplaced their optimism for a breakthrough in trade tensions, although we expect the news flow on trade to remain broadly supportive for risk sentiment this week. All this may translate into another unlucky weak for the dollar and give another chance for EUR/USD to crawl back above 1.12.

• The yen has staged a solid one-figure gain vs the USD this past week on the back of the “hawkish” cut delivered by the Fed. The BoJ also came to the rescue of the currency by not cutting rates, although it sensibly trimmed its forecasts for inflation and growth. Currently, markets are torn about a 10bp cut in December (53% priced in the OIS curve).
• In such supported risk environment, neither the dollar nor the yen is likely to have an easy time next week. Of the two, the dollar is probably richer in negative catalysts (a possibly weak ISM non-manufacturing, for instance), which suggests the risk for USD/JPY may be slightly tilted to the downside this week. We expect the pair to keep edging lower and establish itself in the 107-108 area while waiting for a new clear catalyst (likely, on the trade front) in the coming weeks.

• A very eventful week in the UK has set the sterling for a 1% gain before trapping it in a relatively narrow range. Parliament has voted to send Brits to the polls on Thursday 12 December, and all parties are gearing up for what will be a Brexit-centred electoral campaign. Sterling’s recent strength suggests that the markets are positioned for a Conservative majority win, which would ultimately allow incumbent PM Johnson to have his deal ratified by the House. However, the vulnerability of the Conservatives in Scotland and some Southern-English areas suggests more caution, and we wouldn’t rule out a Labour-led minority or a hung parliament as a result (though this is an outside risk at this point). For now, as long as opinion polls continue to point in the direction of a Tory triumph, it seems unlikely to see GBP fiercely correct lower just yet.
• In this context, the Bank of England meeting (Thursday) will once again be quite an uninteresting one, with the MPC likely sticking to a cautious approach ahead of lingering uncertainty ahead. With some signs that the jobs market is no longer tightening, the pressure to unfold monetary stimulus is probably lower and allows more time for policymakers to assess the internal and external backdrop before adjusting rates.

• The Australian dollar has staged consistent gains this week, taking advantage of stable risk appetite and an encouraging inflation read, that allayed the lingering doubts on whether the RBA will keep rates on hold next week. The market is now pricing in only a 6% probability of a cut next Tuesday, so most of the reaction will likely be driven by the Bank’s forward-looking language. Our base case is that the RBA will refrain from any more cuts at least through the end of 2019, so we would not be surprised to see Governor Lowe providing some indications of a more extended pause in the easing cycle. Alternatively, he may well err on the side of caution and keep the door open for more cuts, whilst expecting developments in the inflation and employment spheres as well as on the global trade backdrop.
• We think that a further stabilisation in risk sentiment and the possibility of a hawkish shift by the RBA suggests that the balance is skewed to the upside for AUD/USD in the next week. The 200d MA at 0.6955 should, however, prove to be a fairly solid resistance to AUD rallies for now.

• The good momentum for the New Zealand dollar will face some challenges next week, as unemployment is expected to have edged up above 4% in 3Q. The NZD has been lifted by a sizable repricing in the RBNZ rate expectations, with markets nearly halving the implied probability of a cut at the upcoming 13 November policy announcement. In order to keep fuelling such a resurgence in rates, markets may require some positive surprise in the labour data out on Tuesday.  
• On the flip-side, the kiwi may find benefit from three key drivers: 1) a further stabilisation in global risk sentiment; 2) a possible hawkish tilt by the RBA; 3) more short squeezing, warranted by the extended net short speculative positions. All in all, we maintain a mildly bullish view on the NZD for the coming week and see NZD/USD break the 0.6465 100d MA, albeit facing some good resistance at the 0.65 psychological level.

• The Bank of Canada's unexpected dovish turn severely undermined  CAD momentum, with the currency struggling to join any risk-on ride ever since. With markets now increasingly considering a cut in the coming months (we still see a chance for a move in December), the so-far immaculate rates attractiveness of the loonie is showing cracks. That might prompt some investors to look at the antipodeans as a valuable alternative to place pro-cyclical bets.
• Next week, the jobs report will be in the spotlight. The key question will be whether a rebound in private payrolls (which fell 21k last month) is on the cards. Should this not be the case, the perceived risk of a rate cut in the coming months will likely grow, thereby more than offsetting the positive spillover coming from a supported risk sentiment.

EUR/CHF seems to have built a fairly solid resistance at the 1.10 level as long as risk sentiment keeps undermining the franc’s safe-haven appeal. In addition, the latest CPI numbers kept pointing at a very gloomy economic outlook in Switzerland.

Overall, we suspect the swiss franc will stay on the back foot next week as risk remains bid,  although we expect eurozone data to keep on signalling an economic slowdown in the common area which suggests somewhat limited upside for the pair moving ahead.

• The Norwegian krone has benefitted from a slew of positive data (PMI and unemployment)  to extend its run, with EUR/NOK now aggressively approaching the 10.10 support. Next week, September industrial production is unlikely to have much market impact, which should allow NOK to keep enjoying the general risk-supportive environment, along with further stabilising oil prices.
• However, with the Norges Bank no longer providing a solid floor, the krone remains amongst the most fragile G10 currencies in case of a risk-off turn.

• Despite some disappointing data, the Swedish krona  retained some good momentum until the end of this week, following the global risk-on mood. Next week, SEK will lack an idiosyncratic catalyst given the shortage of market-moving data releases in Sweden and Europe. In turn, we expect SEK to move broadly in line with global risk sentiment, which suggests a mildly bearish view on EUR/SEK given our expectation for risk assets to stay generally supported.
• Meanwhile, markets remain quite undecided whether to align with the Riksbank indication that it will leave the negative rate zone in its December policy announcement: OIS pricing is showing a 60% implied probability of a rate hike at that meeting. We suspect that, even in the event of a Riksbank hike, its “one-off” character will prevent any considerable rally in SEK.