The G10 FX week ahead will be dominated by fresh growth and inflation numbers and how they play into the stagflation narrative. We’re less worried about the ‘stag’, particularly when it comes to the US and expect the hawkish re-pricing of the Fed curve to keep the dollar supported. Also in focus will be central bank meetings in the eurozone, Canada and Japan
The G10 FX week ahead will be dominated by fresh growth and inflation numbers and how they play into the stagflation narrative. We’re less worried about the ‘stag’, particularly when it comes to the US and expect the hawkish re-pricing of the Fed curve to keep the dollar supported. Also in focus will be central bank meetings in the eurozone, Canada and Japan
U.S. Posts $2.77 Trillion Budget Gap
The dollar rally has stalled recently even though interest rate markets continue to hawkishly re-price the Fed policy cycle. Explaining that may be the better risk environment, where 3Q earnings have come in on the strong side and renewed interest has been shown in the commodity pairs on the back of supply challenges in this sector. Expect to hear a lot more about ‘stagflation’ this coming week – given that we will get fresh updates on growth (3Q US GDP on Thursday) and inflation (the Fed’s preferred price measure, core PCE deflator, released Friday). Our US macro team has a firm view here. We’re less worried about the 3Q slowdown (less ‘Stag’) and more worried about persistent price pressures (‘flation’). Here the core PCE deflator should push up to a new high of 3.7% YoY and provide some fodder to a new theme emerging from the Fed (Quarles, Waller) that high inflation over coming months could bring forward rate hikes.
The week will also see a heavy slate of 3Q US earnings, including tech heavyweights. With 111 of 500 S&P index companies so far reporting, sales and earnings have positively surprised in nearly every sector (ex energy). Thus it looks like high prices can be passed onto the consumer. The Fed will be wary of this heading into their November 3rd meeting. We favour continued strength in the dollar against the low-yielders and energy importers in particular. Elsewhere, and after last week’s surprising large cut in Turkey and large hike in Russia, the EM monetary policy focus this week turns to Brazil. Here a 100bp hike has been communicated and is expected, with risk that BACEN does even more given the weak BRL.
EUR: You say it best, when you say nothing at all
The highlight of the week will be Thursday’s ECB meeting. Here the ECB will be caught between; a) acknowledging that inflation risks have increased and b) wanting to push back against market pricing of an ECB hike in late 2022. Typically the ECB would try to navigate this path by not saying to much and passing the buck to a full review coming at the December 16th meeting. In addition to the ECB, the stagflation story will be very much front and centre in the Euro area too, where we get a first look at 3Q21 GDP data (ING 1.9%, consensus 2.1%) and October inflation (ING 3.6% YoY, consensus 3.7%). Again, growth is looking ok, but the persistence of inflation is a key theme.
So far the EUR/USD correction has stalled at resistance at 1.1670/80. Our short term Financial Fair Value (FFV) models, looking at short term yield spreads, yield curves and risk sentiment point to a 2% overvaluation of EUR/USD – largely because short-dated US yields have continued to power ahead. This time next week we would expect EUR/USD to be trading decisively under 1.16.
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Russian economic activity for September affected by one-offs
JPY: Big update from the BoJ
- The usd/jpy rally has taken a breather over the last week after some strong gains.
- the highlight of the week ahead will be thursday’s bank of japan
- meeting where a fresh update on the outlook for activity and prices will be published. Back in july, the boj had forecast cpi at 0. 6%, 0. 9% and 1. 0% in fy21-23 respectively.
- we doubt there will be any substantial upward revisions
- which will prompt a re-pricing of the typically super-dovish boj policy cycle.
On USD/JPY, we do not want to miss out on a big upmove through 115.00. We have a conviction call that the Fed will have to turn more hawkish – $ positive against the low-yielders. And a call that the energy crisis is here to stay over coming months with low inventory levels in the northern hemisphere. We are already starting to see the Japanese trade deficit widen on energy and will see if the October figure pushes towards the JPY1tr area. We are very bullish on USD/JPY and see the correction finding support somewhere in the 113.20/70 area.
