Key Events This Week: November 9th – 14th:
Wednesday: GBP Claimant Count, Jobless Claims & Average Weekly Earnings. Bank of England Inflation Report, USD Wholesale Inventories. JPY Machine Orders and Foreign Bonds
Thursday: AUD Consumer Inflations Report, USD Initial Jobless Claims
Friday: EUR German GDP, Eurozone Consumer Price Index, Eurozone GDP, USD Advance Retail Sales, Business Inventories, University of Michigan Confidence
Continued bullish trading in the USD, seeing signs of growth in the US relative to the rest of the world, which result in capital inflows into the country. The DXY index is now breaking out of its 30-year down trend, technically suggesting that there is further upside from here.
Draghi has delivered once again, sending a dovish message to markets that should keep EUR sold. Draghi commented on the size of the central bank’s balance sheet in the statement rather than in the Q&A, illustrating that it was a consensus view that the ECB’s balance sheet will grow over the next two years, while the Fed’s balance sheet stagnates. This differential should keep EURUSD sold and transform EUR into a funding currency.
The BoJ easing and the GPIF announcing higher allocation into foreign equities and bonds caused USDJPY to move from 108 to almost 115. Now, while there could be some further JPY weakness as the market was neutral on JPY before the event, we suggest taking some caution from here. JPY sentiment has reached extreme bearish levels, which when previously reached caused a counter-reaction. Also the GPIF related flows may have already occurred, limiting the downside for the JPY.
The Bank of England stayed on hold at this week’s meeting. Only a few months ago, a November rate hike was a real possibility. However, as the pace of data strength has tempered and central banks elsewhere have turned more dovish, the first BoE rate hike is likely to come much later than markets had anticipated only recently. As a result, GBP could weaken further against USD.
Bearish price action in the AUD for a few reasons. First, increased volatility has reduced the carry appeal of the currency. Second, commodity prices continue to decline, especially iron ore, which affects Australia’s terms of trade. Economists have downgraded their outlook for growth and pushed back their expectation of the first rate hike from the RBA. The combination of this with a stronger USD suggests further downside for AUDUSD.
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