Friday’s Fundamental Forecast – 24th September

US Dollar (DXY)


Key news events to watch out for today GMT:

German ifo Business Climate 8:00 AM

Events to watch:

Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

A hawkish Fed with 2022 dots and tapering in view has left the USD in the middle of nowhere. One interpretation is that given a large variance dot plot.,traders still think the bar for a Fed rate hike is much higher than taper.

In my view, it seems that the current FX market is equity-driven, and easing concerns of the Evergrande event is helping stock rebound, and risk betas are flourishing.

Strong equities are pushing the USD index down even though US Treasury yields are soaring. After an initial hesitation at the US open, global yields are finishing the day firmly higher. Given the hawkish FED and the boldness on the tapering front, it is not surprising to see 10-year yields rising, however.

Still, the most critical global variable for FX remains terminal rates pricing. So long as this remains well-mannered, any repricing on the back of central bank communication will remain very constrained, in turn curbing FX volatility.

So while we have Turbo taper about to unfold, it’s bound to be a very gentle incline for interest rates around the globe.

With global yields soaring, investors are looking for a proximate cause. Still, it is more sensible to think of the market as broadly repricing to the risks highlighted from central banks in the last 24 hours, and that rate hike adjustment might come sooner than expected.

The BoE rarely moves markets itself, but yesterday’s hawkishness surprised traders after the FOMC meeting on Wednesday. The Fed might be split, but with the comments from the BoE earlier on Thursday, there would seem to be a growing number of central bankers who suddenly see the need for a brisker tightening in policy.

With more central banks joining the race for yellow jersey to see who lifts off first, FX markets have turned incredibly more dollar neutral where it may now come down to economic data, not sentiment as the keen driver of FX markets as traders might not be so blinded by boredom now.

Suppose the USD is unable to pivot stronger into the weekend. In that case, it will likely make sense to finally redirect away from our unilateral USD bullish bias that we have maintained for the past four weeks and begin focusing again on those currencies of central banks tipping a hat to near term rate hikes.

What we can expect today:

The Fed’s tapering plans have given the green light for higher yield speculation, which should be US dollar supportive on the margin but easing Evergrande concerns and equity hedges reduction are driving the risk-on theme seen across macro assets. And despite the Fed having a strong signal on the soon-coming taper, the US dollar isn’t firing on all cylinders as long US dollar haven hedges are getting reduced. While the dollar selloff after the hawkish Fed seems confusing, The DXY was actually down 2.4% over 6 months after the start of the 2014 Fed taper before entering a 2.5-year higher dollar cycle. With that being said, I am neutral to slightly bullish on the dollar at this moment, but in favour of higher front-end US yields while waiting for a better entry-level to go long US dollars again.

Forecast: Weak Bullish


GOLD


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

Gold got whacked with the taper and rate hike stick overnight as global yields soared.

What we can expect today:

Precious metals had a relief rally ahead of Wednesday’s FOMC this week; however, the broader downtrend in metals should resume, especially with more central banks stepping up to the rate hike plate. Our $1700 Q4 call looks intact while hoping for a significant overshoot to $1650

Forecast: Maximum Bearish


Oil


Key news events to watch out for today:
No key events

Important things that happened recently :

Oil prices rose on Thursday, with Brent crude touching its highest level in more than two months as the energy reflation trade kicks into high gear.

What we can expect today:

Tightness in global gas, coal and power markets suggests a prospect for the oil market to sustain bullishness over the winter. And based on the potential for power generation, fuel-switching( to Oil from Nat Gas) at the grid level. Now $80 bbl becomes a realistic near term target

Forecast: Medium Bullish


The Euro (EUR)


Key news events to watch out for today:
German ifo Business Climate 8:00 AM

Important things that happened recently:

Forex traders booked long USD profits yesterday, but the Euro on its own volition caught a tailwind from higher Bund yields

What we can expect today:

Wednesday’s FOMC outcome was generally seen as hawkish. Judging by price action, the market was long USD going into the event. The move on US rates has been fierce but so far neutralized by higher Bund yields. And after an initial move higher for USD, there hasn’t been any proper follow-through. EURUSD held ahead of the recent lows down around the 1.1660s and is not far off where it was going into the FOMC announcement. For further USD strength to materialize, some market participants will want to see a break to fresh lows for the year.

Forecast: Weak Bearish


The Pound (GBP)


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

A hawkish surprise from the Bank of England caught FX traders wrong-footed.

What we can expect today:

Despite being an “off cycle” MPC meeting with no inflation report, they still managed to generate plenty of volatility. The line which caught the market off-guard was that rate hikes should be the first policy tool to be used- even if required before the end of the current QE programme.

The BoE’s commentary is incrementally more hawkish as the market starts to price in an early 2022 rate hike. We feel that a rate hike in the second half of next year is more likely than the first. Until now, we have pencilled in a winter move, though the tidbits of hawkishness in the latest statement suggest a summer hike growing more likely.

Because I think the market is far too hawkish pricing in a Feb 2022 rate hike, I remain weak bearish on GBP.

Forecast: Weak  Bearish


The Swiss Franc (CHF)


Key news events to watch out for today:
German ifo Business Climate 8:00 AM

Important things that happened recently:

The USDCHF is stuck in no man’s land, currently ignoring soaring US yields.

What we can expect today:

The USD reaction to this week’s hawkish FOMC hasn’t been what some would have expected, with Evergrande risk perhaps being repriced, along with the upcoming German election and expectations that other G10 central banks will follow the Fed.

USDCHF rallied from 0.9220 to a high of 0.9273 and is now right back in the middle of that range. The uptrend line dating back to the beginning of August comes in at 0.9190/0.9200.

EURCHF, meanwhile, is likely to consolidate between 1.08 and 1.09.

Following the latest correction, traders should be biased towards buying USDCHF on dips as long as the trendline stays intact, targeting a test of the recent highs and more.

Forecast: Medium Bearish


The Australian Dollar (AUD)


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

A lull in the Evergrande tumult has boosted the Aussie spirits overnight

What we can expect today:

Evergrande headlines dominate price action in AUD, but even word that China is making preparations for a potential demise hasn’t phased risk-takers. However, given the hawkish Fed and more potential headwinds in China, I still think being short risk, especially AUDUSD makes sense.

Still, headline-driven markets, especially around China credit, are becoming challenging to trade bearish. Still, I’m now starting to think Evergrande will be less about contagion risk and more about a disinflationary global growth story.

Forecast: Weak Bearish


The Kiwi Dollar (NZD)


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

With the lack of domestic macro catalysts, the NZD is still riding the coattails of broader risk markets

What we can expect today:

Once again not too much to say in NZD as per se, but with global risk sentiment buoyant and stocks flying off the shelf again, traders are back in the mood to buy currencies where central banks have tipped their hat for a rate hike, the Kiwi has found itself back in demand.

My personal view is similar to the AUD in that key levels remain intact, and I prefer to be selling on rallies.

Forecast: Weak Bearish


The Canadian Dollar (CAD)


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

The Loonie took flight overnight on a combination of surging oil prices and easing concerns over China Evergrande boosted risk sentiment.

What we can expect today:

Higher beta currencies like stocks were flying off the shelf overnight, and once again, the Canadian dollar had a standout reaction to a positive risk tone. Still, price action doesn’t suggest a clear pattern of the market leaning in CAD just yet.

The pain levels on the topside are a little further away now, and the current uptrend channel is looking like it finally wants to break lower as oil is turning very bid.

Still soaring US yields are holding the Loonie back from taking on the USDCAD 1.2600 level.

Forecast: Medium Bearish


The Japanese Yen (JPY)


Key news events to watch out for today:
Fed Chair Powell Speaks 2:00 PM

Important things that happened recently:

Soaring US yields have taken the USDJPY back above 110.25 

What we can expect today:

With a likely November start to tapering telegraphed (concluding by mid-2022), an even split among members over one 2022 hike, higher longer-term rate projections, and upward revisions to inflation expectations have combined to boost US yields.

Even when US yields were well behaved, USDJPY was sitting at 119.90 on Wednesday. And now, with Evergrande avoiding a near-term USD bond default, it has helped equities and cross JPY to rally up to key resistance levels. Indeed higher US yields and an Evergrande detente could provide a favourable backdrop for USDJPY higher.

Forecast: Medium Bearish