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FX Weekly Preview: EUR Darts Back To Uptrend, But Can It Last

Courtesy of ZeroHedge. View original post here.

Submitted by Shant Movsesian and Rajan Dhall MSTA of

The key move in the FX majors last week as the upturn in EUR/USD, where the first key area of support on the downside at 1.1500-1.1625 held well to generate the move up into the mid-upper 1.1800's.  In the previous week we also asked whether the USD correction was over, and some may assume that based on the key weighting in the USD index – it is.  Clearly the longer term outlook on Europe has been the driver of what is now seen as a default position in FX.  The German economy has been leading the way with solid growth, as Q3 saw a rise of 0.8%, which should be confirmed on Thursday.  Alongside this, we get the PMI data for Nov which will likely confirm more of the same across the whole Euro region, with the German IFO on Friday unlikely to buck the positive trend as the institute maintain their positive growth projections.  

Over the weekend however, the coalition talks in Germany have made the headlines with the FDP leader walking out of the negotiations with Chancellor Merkel's CDU and the Greens, with wide 'differences' of opinion on immigration and climate amongst other issues lower down the pecking order.  This leaves Merkel with 3 options; a new election, governing without a majority or continuing talks for an eventual agreement – all 3 to keep the EUR from maintaining the upside bias with clear conviction. That said, we are in a market which is getting used to brushing aside key risk factors, and the early Asian response is usually tempered to some degree by the more liquid London markets – as we saw with GBP the previous weekend!

For the ECB, it is clearly not all about Germany, as the governing council needs to 'accommodate' for all the EU 27 and therein lies the headwinds for the EUR.  Buba's Weidmann clearly wants to call time on the APP – albeit at a future date – and according to source reports, Messrs Lautenschlager and Villeroy are of the same view, having challenged the commitment to QE.  On the other side of the equation, president Draghi leads the less hawkish camp in maintaining the open-end position on QE, if only to fend off a taper tantrum and another EUR ramp back above 1.2000.  Central bank divisions are nothing new – we have seen this developing at the Fed and the BoE – and in maintaining the status quo or a near term stalemate, the EUR upside will be contained for now, but with a clear upside bias.  

Technically, 1.1880-1.1900 is where we need to breach to underpin the tentative support in place, so focus on this area will draw in sellers in the meantime and keep a USD recovery of sorts on the table.  

In the US, for all the promise of tax reform, which has many hurdles to overcome, the overall contribution to growth is still in question, with the ratings agencies joining in on some of the calls for this to be on the modest side at best.  Given the continued series of collapses in getting reform through, the market may well have priced this in – or out – with apathy here just another reason to keep the stock market grinding higher, but we are seeing mixed performance in the carry trade.  

USD/JPY is now looking heavier, and even after breaking above 114.50 a few weeks back, it was a quick return to the range, which now sees the lower end under threat.  111.50 is the limit to watch on the downside, and with JPY shorts still increasing, positioning is the biggest threat for this pair, with the cross rates now also faltering.  For the USD, as long as the US 10yr Note can hold above 2.30%, then we are likely to hold off an all out collapse at this stage, and we are sure to hear from the BoJ if we do, with their uber easy policy reiterated at every chance. 

Data out of the states next week is all stacked up over Tuesday and Wednesday as we have Thanksgiving holidays over Thursday and for most – Friday also, with Wednesday's schedule covering durable goods and Michigan sentiment before we get the FOMC minutes later in the day.  We really cannot get much more out of Fed communication other than a Dec hike is likely with 3 more hikes expected over 2018, and the latest inflation data which saw the core rate ticking up to 1.8% will not be covered until next month's meeting.  

More promises on the Brexit talks proving constructive and that progress is coming, but little evidence.  All the while, GBP is still trying to push higher, with last week's UK data showing resilience in the economy for now – but that is for now. There is little doubt that the air of uncertainty is holding back investment, and while the loss of business out of London will not mean an all out collapse of the UK economy, we have to anticipate negative forces on growth down the line. 

Over the weekend, Chancellor Hammond stated that the public deficit is to fall 'at last', but with London contributing a large chunk of revenue to the Treasury, this will be seen as temporary as yet.  He also believes the Brexit talks are on the brink of a turning point, but along with minister Davis, the government will continue to look up developments in a positive light – though all agree that a no deal is still a possibility.  The deadline for commitment on the divorce bill is also getting closer, and all hopes for a transitional deal and trade talks depend on this no matter how 'positive' UK beliefs are.  The latest PSNB data is out on Tuesday, but all eyes on Q3 GDP on Thursday as well as business investment.  

As such, those looking to push GBP higher from current levels will have to expect a bumpy ride, and if the USD does come back for another bout of strength over the near term, then a return to 1.3000 cannot be ruled out.  Under-valuation kicks in when or if we push below here, but under the circumstances, we continue to stick with the 1.2500-1.3500 range scenario until we can see something breaking either side of this.  

EUR/GBP is similarly tight, but as above, if EUR/USD resumes the longer term quest for 1.2000 and beyond, it will likely drag the GBP rate kicking and screaming, but for now 0.9025-50 caps.  

Getting limited air time last week was the progress on the talks on NAFTA, and naturally there is little progress to report on as the US pursue efforts to reduce their trade deficit.  Hopes of some basis of agreement by the end of year are all but dead, with the deadline here at end March 2018.   Canada's minister of foreign affairs Freeland has been pretty candid throughout, expecting a challenging process, but overall, talks have proceeded with civility, so CAD weakness of late is all down to the anticipated BoC rate path.  Aggressive tightening expectations have been successfully tamed by the central bank, and while there may be a little more receding in the longer end of the yield curve, the longer term outlook here should contain CAD sales to a larger degree.  

As we have seen in recent week's, 1.2900-1.3000 has been a strong area to contend with, but even if we push past this, the likelihood of a return to 1.3500 looks remote at best, just as 1.2000 does on the downside. Data watchers will only have the Sep retail sales numbers to look to next Thursday, but with Oil prices at higher levels, we expect to see margins improving the GDP input further down the line.  

This should also be taken into account when watching the demise of the AUD in recent weeks and months.  Throughout the downturn which saw the USD rate dip under 0.7550, industrial metals have held up well, and with mining investment and activity bottoming out at the very least, then we should see positive drivers on growth feeding through.  For now however, the market is obsessing over wage growth and inflation, and with job gains less than expected, the short termists have maintained the pressure on AUD, and the dip in US equities also hitting the higher yielders vs the JPY.

We see key weekly trend line support on AUD/USD cutting in around 0.7500, and this will attract some decent buying interest, if not temporarily then at least when we get a clearer picture on the USD going forward.  Even in that instance, we may see some resilience here and in the NZD/USD, which saw renewed pressure also last week, breaking below the previous 0.6815-20 support to see the Antipodeans moving in tandem.  

In Australia we get the RBA minutes on Monday night, with gov Lowe speaking again on Tuesday – Q3 construction work done is on Wednesday night and gets some attention due to the GDP input.  Retail sales on Wednesday and trade stats on Thursday for NZ, with upside surprises for the former likely after the strong job gains seen in Q3.  

For the Scandies, it is now the 18th week that we have seen NOK/SEK holding inside 1.0100-1.0360, with both currencies losing out against the EUR and the USD.  The Riksbank will not be complaining, while the Norges bank is a little more relaxed on the exchange rate, focusing on removing oil and gas stocks from the benchmark index on their Sovereign Wealth fund, which has now hit the $1trln mark. 

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