FX Trade Ideas abd Global Trends
The global reflation trade has increased its momentum, but unlike what we saw for the firstnine months of this year when reflation focused on EM asset classes it is now Japan and the US which are in investors’ focus. Meanwhile, the EM currency index has lost 5% since 7 September. Long positions in S&P futures, which fell sharply in early Q3,are now back close to their highest levels of the year. This bullish equity positioning was mirrored by a sharp reduction in long positions in U.S. Treasuries and oil prices reaching a two-year high. mirrored by a sharp reduction in long positions in U.S. Treasuries. In this sense markets have similar characteristics to what was observed late last year when prospects of US tax reform and other regulatory changes pushed the USD higher with the help of widening interest rate differentials, allowing US, Japan and EMU equities markets to outperform the EM markets. Indeed there are signs that foreign investors are rushing in to buy Japanese equities as in 2013 when ‘Abenomics’ lifted off. Nonetheless, there is one big difference. In 2013, Japan’s equity market received its inspiration from a sharply falling JPY. Nowadays, the inverse relationship between the evolution of Japan’s Topix and the performance of the JPY has eased.

ECB succeeds. The ECB has provided a dovish taper with President Draghi stressing that there is still “a large amount of uncertainty”adding that the decision about the asset-buying plan “is for an open-ended program”and it is not going to stop suddenly. His suggestion the ECB may lag the Fed by about 3-4 years pushed long-term yield differentials sharply in favour of the USD. Markets will now have to rebalance, suggesting EURUSD could see 1.1530/10 before stabilising. However,as long as EURCHFremains in a bullish trend we see longterm EUR buyingneeds soon returning, pushing the EUR higher once again.
JPY should weaken. This morning’s release of Japan’s September core CPI (0.7%Y)undershot the median (0.8%) supporting our view of the BOJ maintaining current parameters of its yield curve management for longer. Recently, Japanbased investors have increased their purchases of short-dated foreign currency denominated bonds. Short term bonds tend not be currency hedged, indicating that confidence in foreign currency strength has increased.

US data strength. Today’s US focus will be on the release of the Q3 GDP report. Adverse weather conditions may have depressed activity in Q3(our tracking estimate is at 3.2%) which should be made up by a better Q4 reading. Hence markets may tolerate a weaker GDP reading and put their entire focus on the core PCE. Should the PCE exceed the consensus 1.3%Q estimate, US bond yields may rise further taking USDJPY beyond the 114.40 chart mark, openingupside potential to 116.75. The University of Michigan will provide us first indications concerning the strength of the economy entering November. Latest PMI reports including yesterday’s Kansas City Fed’s October manufacturing index rising to 23, setting a 6-year high, suggest that the economy is in good shape.
AUD in trouble. Australia, which is in the middle of a consumer slowdown, will be exposed to political headwinds as Australia’s High Court invalidated the election of the country’s deputy PM Barnaby Joyce, losing the Turnbull government its majority. There will now have to be a by-election – which Joyce will recontest – but that will be on Dec 2at the earliest. There will be a period of increased uncertainty which should put the AUD under additional selling pressure. The break of AUDUSD 0.7710 has opened downside potential to 0.7340.