FOREX WEEKLY 4 October 2017 Weekly information issued by the FOREX Advisory Team Global Forex Sentiment The global recovery continues, well synchronized across regions and broadening into investment. US growth remains decent, if unexciting, while Europe and Japan have shown further upside. China has likely peaked, but other EMs are catching up. Inflation remains weak, despite declining unemployment, raising doubts about the Philips curve, and pointing to structural factors. Continuing expansion should further reduce slack and eventually help push prices, but not without stability risks. Core central banks thus remain cautious, while seemingly determined to normalize policies gradually: having initiated its balance sheet run-off, some analysts expect the Fed to hike this December and twice in 2018. The ECB is likely to taper further in 2018 and may consider gradually lifting its negative rates later in 2018. Politics again acted as the catalyst to sell euros. Last week was the German elections, and this week it is the escalating crisis in Catalonia. The German coalition government talks are expected to drag on for some time. The violence that attended the symbolic Catalan referendum and a potential declaration of independence in its wake has raised political tensions in Spain. Over in the UK, embattled Theresa May came under additional fire as Tory party divisions over Brexit reopened. The cabinet infighting over the future UK-EU relationship is buoying EUR/GBP in the face of the euro correction. EM Asia (ex-china) continues to benefit from the synchronized global expansion, with improving US Capex and the related tech cycle being good news for the regions exports in particular, its small open economies (Korean, Taiwan, Malaysia, Thailand). Initially driven by a global revival of manufacturing, the recovery has since spilled over into labor markets, supporting domestic consumption and some areas of investment. Trader view in 2 snapshots EUR USD Full view: page 2 GBP CAD Full view: page 3 Will the Fed increase interest rates? Would the Sterling become toppish? Build a short EUR/USD Position. Build a Short GBP vs CAD Position. A publication of the FOREX Advisory Team Banque SYZ SA Tel. +41 (0)58 799 19 25 fxtrading@syzgroup.com www.syzgroup.com Contacts: José-Manuel Luna Pier-Luigi Bonelli Ugo Biancaniello Table of contents (click on hyperlinks) Trader view... 2-3 Bloomberg FX Forecasts... 4 IMM Positioning... 4 Global Market Focus... 5 Disclaimer at the end of the document.
TRADER VIEW: EUR USD: Will the Fed increase interest rates? Trading Idea & Hedging Solution We still keep our medium term bullish view on the EURUSD. However, in a short term view we believe the EUR vs USD should correct in the downside. Here our strategy (spot ref 1.1750) : Sell 1/3 at 1.1750 ; 1/3 at 1.1880 and 1/3 at 1.2045 Place de following orders to buy EUR : Stop Loss at 1.2175 (-2.4%) Take Prodit at 1.1350 (+4.6%) Support II Support I Spot Resistance I Resistance II 1.1495 1.1615 1.1750 1.1850 1.2075 Technical The EUR/USD is still trading above the first support à 1.1615. A break of this level will open the way to 1.1130. Higher, 1.1850 and 1.2075 are the main resistance to surpass and trade much higher. Market Update The decision in the race for the top Fed job is getting closer. There are rumors that US President Donald Trump last week held talks with the current Fed chair Janet Yellen, the board member Jerome Powell, economic advisor Gary Cohn as well as the former board member Kevin Warsh. Trump himself has said that he will announce in the coming three weeks whether he will nominate Yellen for another period in office. In particular a potential nomination of Warsh caused a stir on the markets as he is seen as a critic of the Fed s ultra-expansionary monetary policy of the past few years and thus as an extremely hawkish candidate for the post. Moreover Warsh was the joint author of an article published a few months ago that supports the tax plans of the current government, which means he has racked up some credit on the loyalty front towards Trump. That in turn increases his chances notably. However, would the Fed under Trump really become more hawkish, i.e. would it hike rates more quickly? The market seems to be considering that. However, in doing so it forgets one thing: a notably tighter monetary policy would run contrary to Trump s economic policy. Should the US President enforce this aspect when nominating candidates for the open posts with the Fed the exact contrary of the current market expectations might in fact arise: the Fed might become notably more dovish? However, fear not dear dollar bulls: that would have far less effect on the US currency at present than the possibility of a hawkish approach. After all the market is only pricing in a half-hearted rate hike cycle anyways. From the market s point of view, the potential of an even more dovish monetary policy (with the exception of rate cuts) is therefore much smaller than that of a more hawkish approach. Page 2
TRADER VIEW: GBP CAD : Would the Sterling become toppish? Trading Idea & Hedging Solution Since the beginning of September the GBP/CAD moved much higher due to the comments of the BOE s Governor whom talked about future rates hike. However, with the Bank of Canada that increased its rate by 0.25% the last week, the GBP/CAD found its resistence. At this level, we think it s a good opportunity to build a short GBP vs CAD position, Here our strategy (forward 2 months) on a spot reference at 1.6610: Sell ½ Position at 1.6610 and Sell ½ Position at 1.6830 Place the following orders to buy GBP : Stop Loss at 1.7090 (-2.2%) Take Profit at 1.5850 (+5.2%) Support II Support I Spot Resistance I Resistance II 1.6020 1.6310 1.6610 1.6850 1.7090 Technical The level of 1.6650-70 is the first resistance to break to see much higher. On the downside, 1.6310 and 1.6020 are the two supports to surpass to see our target. Market Update Q2 GDP growth was confirmed at 0.3% q-o-q. Q1 growth was revised up by 0.1ppt, to 0.3% q-o-q. But small downward revisions to growth in 2016 mean year-on-year growth has been revised down from 1.7% to 1.5% y-o-y. The second estimates of the Q2 expenditure mix showed consumption growth revised up from 0.1% to 0.2% q-o-q. Total investment was revised down marginally from 0.7% to 0.6% q-o-q, although business investment was revised up from 0.0% to 0.5% q-o-q. Export growth was revised up from 0.7% to 1.7% q-o-q, while imports growth was revised down from 0.7% to 0.2% q-o-q. Net trade contributed +0.4ppts to Q2 growth (0.0ppts in the previous estimate). Offsetting the upward revisions to net exports and consumption growth, government consumption growth was revised down from 0.6% to 0.1% q-o-q. Regarding the near term outlook, probably the most significant news was a disappointing services growth estimate for July. Growth came in at -0.2% m-o-m (consensus +0.1%). And 3m/3m growth came in 0.5% (consensus 0.7%). Page 3
SYZ ANALYSTS FORECASTS Ccy Pairs 6M 1Y EUR/USD 1.18 1.25 GBP/USD 1.30 1.33 USD/JPY 115 112 USD/CHF 0.98 0.97 USD/CAD 1.27 1.25 AUD/USD 0.78 0.80 EUR/JPY 136 140 EUR/GBP 0.91 0.94 USD/CNY 6.60 6.80 USD/ZAR 13.00 12.00 USD/TRY 3.30 3.00 USD/MXN 16.50 16.00 USD/BRL 3.20 3.00 USD/RUB 55.00 58.00 BLOOMBERG FX FORECASTS October Maturity EURUSD EURCHF USDCHF Q4 2017 1.1800 1.1445 0.9700 Q1 2018 1.1800 1.1445 0.9700 Q2 2018 1.1900 1.1545 0.9700 Maturity EURJPY USDJPY AUDUSD Q4 2017 132.15 112.00 0.7900 Q1 2018 132.15 112.00 0.7800 Q2 2018 134.45 113.00 0.7900 Maturity EURGBP GBPUSD USDCAD Q4 2017 0.9005 1.3100 1.2400 Q1 2018 0.9075 1.3000 1.2400 Q2 2018 0.9085 1.3100 1.2300 IMM POSITIONING December 2017 Contract size Position Non-commercial Commercial Last Actual Last Actual EUR 100K JPY 12'500K CHF 125K GBP 62.5K AUD 100K CAD 100K Short 127'272 95'512 236'626 261'208 Long 190'025 183'679 149'288 152'592 Net 62'753 88'167-87'338-108'616 Short 93'757 114'310 53'357 50'047 Long 42'435 42'963 120'365 140'482 Net -51'322-71'347 67'008 90'435 Short 14'956 16'788 5'775 6'109 Long 13'387 14'926 10'329 13'773 Net -1'569-1'862 4'554 7'664 Short 86'717 75'091 75'089 80'987 Long 76'556 80'145 80'934 66'178 Net -10'161 5'054 5'845-14'809 Short 30'478 26'313 105'724 104'186 Long 102'990 103'507 18'702 14'921 Net 72'512 77'194-87'022-89'265 Short 41'829 28'083 229'684 130'317 Long 100'675 102'688 149'713 33'487 Net 58'846 74'605-79'971-96'830 Page 4
GLOBAL MARKET FOCUS Japan CPI The consumer price index (CPI) increased 0.7% y-o-y in August (BBG: 0.6), accelerating from 0.4% in July and recording the highest reading since the consumption tax hike in April 2014. However, most of the price gains were due to higher food and energy prices. In fact, the Bank of Japan's (BoJ) preferred measure of core CPI, excluding fresh food and energy prices, edged up 0.2% y-o-y in August. Looking ahead, the Tokyo CPI for September shows little sign of change from the current inflation dynamics. The real economy remained solid in August. Labour market conditions are at historically tight levels. The seasonally adjusted jobless rate was unchanged at a multi-decade low of 2.8% (HSBC: 2.8%, BBG: 2.8%) and the job-to-applicant ratio stayed at 1.52 (BBG: 1.53). Meanwhile, industrial production increased 5.4% y-o-y in August (BBG: 5.2%), following 4.7% in July, while companies forecast elevated level of production growth in the months ahead. Inflation dynamics are improving but at a very slow pace and still remain far below the BoJ's price stability target. Indeed, the bulk of price increases are coming from higher energy prices, while the BoJ's preferred measures of core CPI, excluding fresh food and energy, still remains barely positive at 0.2% y-o-y in August. Moreover, apart from some acceleration in part-time wage growth, the most recent reading for average monthly cash earnings actually declined 0.6% y-o-y in July. As such, the BoJ should be able to comfortably stay the course with extremely accommodative policy. DISCLAIMER This document is for distribution to professional or institutional clients or counterparties only and is not intended for distribution to or use by, retail customers or any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where the distribution, publication, availability or use of such document would be contrary to law or regulation. This publication is for information only and does not constitute a contractual document, an offer, or a solicitation of an offer, to buy or sell any investment or other financial product. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Any opinion is valid only as of the date of this publication and may be changed at any time without prior warning. Past performance is not an indication of future results. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. Banque SYZ SA disclaims liability for any and all forms of loss or damage arising out of the use of them. Before any investment, the recipient of this document has to consult with your own legal, financial and/or tax adviser. This document may not be reproduced or distributed, either in part or in full, without the prior authorisation of Banque SYZ SA. These opinions reflect the short term views of the FOREX TRADING team and can differ from the long term investment policy of Banque SYZ SA. Page 5