EUR
FUNDAMENTAL BIAS: WEAK BEARISH
1. The Monetary Policy outlook for the ECB
The ECB provided an overall balanced policy decision at their September meeting. They chose to slow the pace of asset purchases, explaining that the current levels of financing conditions allow them to buy assets under the PEPP at a ‘moderately’ slower pace compared to the pace of purchases seen in Q2 and Q3. However, as expected, the bank made it very clear that the move was not tapering it was merely a recalibration of purchases (when you plan to perform less QE that’s technically tapering but who’s counting). The bank raised their inflation projections for 2021, 2022 and 2023, and even though the 2021 projections were arguably not as high as markets were hoping for, the more important medterm projections still showed inflation moving to well below the bank’s 2% target to affirm the transitory view of recent price pressures. All in all, the decision was broadly balanced and as a result failed to inspire any meaningful reaction in European assets. For now, market’s attention turns back to the incoming data to pave the way for clarity on the PEPP and API (and a possible transition).
2. The country’s economic developments
Earlier issues with vaccinations and lockdowns at the start of 2021 weighed on EU growth prospects, with growth differentials against the US and UK still quite wide, despite some of the recent strong economic data. Fiscal support in the US and UK have given their economies a firm advantage over the EU. However, recent activity data suggests the hit to the economy from recent lockdowns weren’t as bad as feared and some data has surprised higher. That alone isn’t enough to change the current bias. Another factor to watch is the discussions among European states to allow the purchase of green bonds not to count against budget deficits. If such a decision were to be approved, it could change the fiscal picture drastically and we would expect that to be a big positive for the EUR and European equities. This week we also have a fresh round of PMI data for the EU where data is broadly expected to show a slowdown as the reopening impact continues to fade. Given the current supply chain challenges there will arguably be more focus on things like suppliers delivery times in relation to the headline prints.
3. Funding Characteristics
An interesting driver for the EUR is its funding characteristic exhibited during risk off sentiment. As a low yielder (like the JPY and CHF), the EUR has been an interesting choice among carry trades, especially during 2019 it was a favourite funder against high yielding EM currencies, and part of the big upside in the EUR during the initial risk-off scare in March 2020 was attributed to an unwind of large carry trades. Recently we’ve seen the EUR exhibit some resilience during jittery risk tones despite USD strength. As more central banks start normalizing policy, the EUR’s attractiveness as a funding currency could keep it pressured in the med-term vs higher yielders. However, it could spark risk off upside if some of those trades unwind. This doesn’t make the EUR a safe haven, but as rates climb globally it can become more sensitive to risk.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +3936 with a net non-commercial position of -18398. The stretched positioning for large speculators we noted last week have calmed down with the recent push higher, but leveraged funds are still sitting on a sizable net-short positioning. Thus, we would not be interested in chasing the EUR lower from here without seeing more mean reversion first.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation. All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish.
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term.
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata.org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term, the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. Economic Data
Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans.
5. CFTC Analysis
Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
FUNDAMENTAL BIAS: WEAK BEARISH
1. The Monetary Policy outlook for the ECB
The ECB provided an overall balanced policy decision at their September meeting. They chose to slow the pace of asset purchases, explaining that the current levels of financing conditions allow them to buy assets under the PEPP at a ‘moderately’ slower pace compared to the pace of purchases seen in Q2 and Q3. However, as expected, the bank made it very clear that the move was not tapering it was merely a recalibration of purchases (when you plan to perform less QE that’s technically tapering but who’s counting). The bank raised their inflation projections for 2021, 2022 and 2023, and even though the 2021 projections were arguably not as high as markets were hoping for, the more important medterm projections still showed inflation moving to well below the bank’s 2% target to affirm the transitory view of recent price pressures. All in all, the decision was broadly balanced and as a result failed to inspire any meaningful reaction in European assets. For now, market’s attention turns back to the incoming data to pave the way for clarity on the PEPP and API (and a possible transition).
2. The country’s economic developments
Earlier issues with vaccinations and lockdowns at the start of 2021 weighed on EU growth prospects, with growth differentials against the US and UK still quite wide, despite some of the recent strong economic data. Fiscal support in the US and UK have given their economies a firm advantage over the EU. However, recent activity data suggests the hit to the economy from recent lockdowns weren’t as bad as feared and some data has surprised higher. That alone isn’t enough to change the current bias. Another factor to watch is the discussions among European states to allow the purchase of green bonds not to count against budget deficits. If such a decision were to be approved, it could change the fiscal picture drastically and we would expect that to be a big positive for the EUR and European equities. This week we also have a fresh round of PMI data for the EU where data is broadly expected to show a slowdown as the reopening impact continues to fade. Given the current supply chain challenges there will arguably be more focus on things like suppliers delivery times in relation to the headline prints.
3. Funding Characteristics
An interesting driver for the EUR is its funding characteristic exhibited during risk off sentiment. As a low yielder (like the JPY and CHF), the EUR has been an interesting choice among carry trades, especially during 2019 it was a favourite funder against high yielding EM currencies, and part of the big upside in the EUR during the initial risk-off scare in March 2020 was attributed to an unwind of large carry trades. Recently we’ve seen the EUR exhibit some resilience during jittery risk tones despite USD strength. As more central banks start normalizing policy, the EUR’s attractiveness as a funding currency could keep it pressured in the med-term vs higher yielders. However, it could spark risk off upside if some of those trades unwind. This doesn’t make the EUR a safe haven, but as rates climb globally it can become more sensitive to risk.
4. CFTC Analysis
Latest CFTC data showed a positioning change of +3936 with a net non-commercial position of -18398. The stretched positioning for large speculators we noted last week have calmed down with the recent push higher, but leveraged funds are still sitting on a sizable net-short positioning. Thus, we would not be interested in chasing the EUR lower from here without seeing more mean reversion first.
USD
FUNDAMENTAL BIAS: WEAK BULLISH
1. The Monetary Policy outlook for the FED
More hawkish than expected sums up the Sep meeting. The FOMC gave the go ahead for a November tapering announcement as long as the economy develops as expected with their criteria for substantial further progress close to being met. The biggest hawkish tilt was the announcement about a faster pace of tapering, with Chair Powell saying there is broad agreement that tapering can be concluded by mid2022. Inflation projections were hawkish, with the Fed projecting Core PCE above their 2% until 2024. On labour, Chair Powell said he thought the substantial further progress threshold for employment was ‘all but met’ and explained that it won’t take a very strong September jobs print for them to start tapering as just a ‘decent’ print will do. The 2022 Dots stayed very close to the June median, but the rate path was much steeper than markets were anticipating with seven hikes expected over the forecast horizon (from just two previously). It is important here to note though that even though the path was steeper, if one compares that to a projected Core PCE >2% for 2022 to 2024, the rate path does not exactly scream fear when it comes to inflation. All in all, it was a hawkish meeting. Interestingly, it took markets about three days to realize this as the expected price action only really took hold of markets a few days later. A faster tapering was a key factor we were watching for an incrementally bullish tilt in the outlook, so market’s initial reactions were surprising. However, with the recent breakout in both US yields and the USD, this has given us more confidence in moving our fundamental outlook for the Dollar from Neutral to Weak Bullish.
2. Real Yields
With a Q4 taper start and mid-2022 taper conclusion on the card, we think further downside in real yields will be a struggle and the probability are skewed higher given the outlook for growth, inflation and policy, and higher real yields should be supportive for the USD in the med-term.
3. The global risk outlook
One supporting factor for the USD from June was the onset of downside surprises in global growth. However, recent Covid-19 case data from ourworldindata.org has shown a sharp deceleration in new cases globally. Using past occurrences as a template, the reduction in cases is likely to lead to less restrictive measures, which is likely to lead to a strong bounce in economic activity. Thus, even though we have shifted our bias to weak bullish in the med-term, the fall in cases and increased likelihood of a bounce in economic activity could mean downside for the USD from a short to intermediate time horizon (remember a re-acceleration in growth and potentially inflation = reflation)
4. Economic Data
Economic data will be very light in the incoming week with the main highlight being IHS Markit Flash PMI data. However, also keep in mind that the Fed has largely taken the sting out of economic data going into the November FOMC meeting as they have already acknowledged a November taper announcement as well as a possible mid-2022 conclusion. Thus, even though economic data will still be important, it is unlikely that incoming data will sway the Fed from their tapering plans.
5. CFTC Analysis
Latest CFTC data showed a positioning change of +3036 with a net non-commercial position of +35062. Positioning isn’t anywhere near stress levels for the USD, but the speed of the build-up in large specular positioning measures over 2-standard deviation on a 1-year, 6-month and 3- month look back period. Thus, even though the med-term bias remains unchanged, it does mean the USD could be sensitive to mean reversion risks while still trading close to YTD highs. Thus, reflationary data and overall risk sentiment will be a focus for the USD.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.