USD Outlook, EURUSD and EUR Cross Currency Basis Swaps, GBP and Brexit 




Market expectations for a December Fed rate hike are slowly creeping higher (now 60%) with Fed’s Bullard the most recent to highlight this was the base case. We look for US data to generally support that story this week, with a modest bounce-back in ISM PMIs (Manufacturing today, Services Wed) and culminating in a good September NFP on Friday. Our Payrolls Dashboard highlights the FX impact were our call of +210k NFP headline and 0.3%MoM average earnings to prove near the mark – namely around 1% USD strength against the low-yielders. Last week’s exceptionally narrow range in DXY was 95.13 to 95.96. Expect momentum accounts to follow a range break in a low volatility environment – which we tend to favour on the upside.

Late last week EUR/USD was very much driven by the performance of DB shares, where a potentially lower settlement with the DoJ eased pressure on EZ bank stocks Friday. Bloomberg is today reporting that a deal has yet to be reached, thus further volatility may be in store. It is a quiet week for Eurozone data, merely final releases of PMIs and instead we think the EUR will more be driven by developments in Eurozone banking. On that subject, we noted the EUR cross currency basis swap widened sharply last week. This may have been driven by quarter end or US money market reform. Should it continue widening, it may suggest a reluctance to lend USD into Europe again. Apart from pressuring EUR/$ to 1.1150 again, this could also hit SEK, where the Swedish banking system is one of the most reliant on wholesale markets for funding. 9.68/72 is significant resistance for EUR/SEK, above which 9.80 beckons.

In her speech to the Conservative party conference yesterday, UK PM May suggested Article 50 would be filed by the end of March 2017. No ‘running commentary’ would be provided on negotiations, suggesting that the lack of transparency will continue. We doubt international investors will appreciate this and with the dollar staying bid this week can see Cable retesting the low at 1.2800. EUR/GBP can extend towards the 0.88 area, but at those levels will be stretched from a valuation perspective.

Nearly 98% of those voting in Sunday’s Hungarian referendum rejected EU mandated quotas for a possible 1300 asylum seekers. The turn-out was below the 50% threshold, although PM Orban has threatened to make this constitutionally binding. We doubt that this has a meaningful impact on HUF pricing, where the strong C/A surplus should see EUR/HUF to 305 in a month.