Key Events This Week: November 2nd – 7th:
- Monday: GBP UK PMI Manufacturing USD ISM Manufacturing, ISM Prices Paid, Construction Spending
- Tuesday: AUD Trade Balance, Retail Sales, Reserve Bank of Australia Rate Decision, EUR European Economic Forecasts, USD Trade Balance, Factory Orders
- Wednesday: JPY BoJ Kuroda Speech. GBP UK Services PMI, UK Composite PMI, EUR Eurozone Retail Sales, USD ADP Employment change, ISM Non Manufacturing, JPY Bank of Japan Meeting Minutes
- Thursday: AUD Employment Change, Unemployment Rate, JPY Japan Services PMI, Composite PMI, Leading Index, Coincident Index, EUR German Factory Orders, German Construction PMI, German Retail PMI, Eurozone Retail PMI, GBP Industrial Production, Manufacturing Production. GBP Bank of England Rate Decision, Asset Purchase Target November, EUR European Central Bank Rate Decision, USD Initial Jobless Claims
- Friday: CHF Unemployment Rate, Retails Sales, EUR German Industrial Production, German Trade Balance, GBP Trade Balance, USD Unemployment Rate, Change In Non Farm Payrolls, Consumer Credit, CAD Unemployment Rate
The Fed again has provided the USD with a boost against a broad range of currencies. The growth potential in the US is exceeding that in the rest of the world, suggesting that the USD could stay strong. Indeed, 3Q GDP was higher than expected. While capital flowing back into the US provides the US with a glut of cheap USD, the rest of the world, facing capital outflows, see their USD liquidity tighten.
We remain bearish on EURUSD, The EUR has declined due to low inflation expectations, an accommodative ECB and declining growth outlook. The flows into the region that were previously keeping the currency supported are starting to turn around. Portfolio flows (equity and bond) and M&A flows are suggesting that there are outflows, supporting our bearish view. Bank lending abroad is picking up, suggesting the EUR is turning into a funding currency. The ECB will be watched closely this week.
USDJPY has already move up close to 113 following the break of the previous high around 110. Further upside from here in the very short-term period will be more of a grind. USDJPY has recently been strongly correlated to the US TIPS yields . Without an increase in real interest rates in the US, USDJPY could face some resistance sooner or later. However, the prospect for US monetary policy to shift to a tightening cycle is likely to drive US yields up as well as weigh on commodity prices. The higher TIPS yields, in turn, will likely underpin the USDJPY rally in the mid-term.
Recent comments from BoE members suggest that hikes may need to come later than expected. Weak pay growth and concerns about external growth will both give the BoE room to postpone its hiking cycle. What’s more, inflation in the UK has come down, and the market sees further downside risks given global disinflationary pressures. As a result, we expect GBP to remain pressured over coming weeks.
Improvement in Chinese data has offered some support to AUD, but we remain bearish. Increased volatility has reduced the carry appeal of the currency. Iron ore prices have stabilized somewhat but remain weak overall. Global disinflationary trends and a weaker growth outlook could mean a more doveish RBA. Any mention of the strength of the currency this week by the RBA would add to bearish sentiment.
For full details on these data releases and all others please see our Economic Calendar. And for what to expect from our Trader Lifestyle section this week, head to Week Ahead: Trader Lifestyle.
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