Cross Market Analysis

1. Long GBPCHF and short EURNOK should gain traction this week

Activity data from the eurozone continues to print on the soft-side of expectations with German factory orders declining 5.7% in August (-2.5% expected) and the eurozone retail PMIs sinking further into sub-50 recessionary territory. However, with ECB policy now very much focused on the evolution of inflation expectations, EUR sensitivity to cyclical numbers is quite low. Rather, market participants will direct their attention to measures of inflation expectations as they continue to evaluate the success of ECB communication at the meeting this past week. UK August manufacturing production numbers may be more important, with continued steady recovery (our economists expect an upside surprise of +0.4% m/m/ vs flat expectations) likely to support expectations for early 2015 rate hikes and boost the GBP. Elsewhere in Europe, Norway will be in focus with the budget on Wednesday and CPI on Friday. We remain long GBPCHF and short EURNOK.

1. Commodity bloc caught in cross current – CAD to remain the outperformer

The combination of suppressed US back-end yields (supportive) and weakening in commodity prices (negative) continues to send a conflicting message for the AUD, NZD and CAD. We view that risk appetite will remain reasonably well supported even after the Fed puts an end to QE as the easing baton is passed to the ECB and BoJ. We also note that our Latam strategy team’s risk appetite model is giving a ‘risk on’ signal at the moment. We expect the CAD to be the outperformer and see scope for domestic data to improve, including the September jobs report on Friday. Accordingly, we remain short EURCAD. Meanwhile, we expect the AUD to be the underperformer. Today’s TD Securities monthly inflation report (which has a reasonably close relationship with the official quarterly release) indicates that that inflation pressures declined substantially in Q3, with the inflation rate dropping from 3% in June to 2.2% in September. The official release is due on 22 Oct, while for this week the RBA meeting on Tuesday and Chinese lending data will be in focus. We view that AUD’s underperformance is best positioned for vs the NZD, noting that AUDNZD still remains very elevated relative to 2yr swap spreads.

1. USD to maintain momentum post payrolls

The data calendar is quiet this coming week in the US, but the after effects of Friday’s strong jobs report are likely to keep the USD well supported as markets continue to anticipate Fed rate hikes as soon as the middle of next year. The minutes to the Fed’s September meeting will be released on Wednesday and we expect to see some discussion about the merits of dropping the “considerable time” language at some point. Our economists expect forward guidance to evolve gradually, with “considerable time” disappearing as soon as October but with new language taking its place that warns markets not to expect rate hikes to come too quickly. We remain bullish on the USD as we head into October, but expect gains to come mostly against the low-yielding EUR, JPY and CHF, while other higher-yielding G10 currencies will likely hold up better in a rising US rate environment. We remain short EURUSD heading into this week, targeting a move down to 1.22.