News and Events:
Event of the Week was NFP release
The week has been dominated by surprisingly weak US nonfarm payrolls in September. The unexpected weakness in US jobs data triggered a sharp price action. Especially given that the US government shutdown in October has not been taken into account. We believe that shifting our Fed tapering expectations to March 2014 is realistic at the current economic setting. USD broadly extended weakness and shifted FX prices to fresh levels. Low US yields and the extension of the cheap funding environment should continue to weigh on USD. DXY hit 79.081 just a stone's throw from the year low of 78.918; we see further room on the downside. As for today US durable goods orders we should see the strongest read in the last three months. The boost is expected to be attributed to large aircraft orders in September. While tapering consensus is around March there is room for this date to be pulled in if data starts to improve.
EUR Gained Momentum
The major shift has clearly been in the euro cross. EURUSD traded to fresh year-high of 1.3825 and is expected to develop upwards. Yet regarding the technical indicators, EUR purchases have been too massive and too fast pushing the 14-day RSI (74%) in the overbought zone, and the pair trades above the upper-Bollinger band (1.3784). We believe that a corrective downside move should be healthy and generate dip-buying opportunities above 1.3695/1.3700 bid zone. Moving forward, the weakness in USD is likely to add some more gains to EURUSD. Interestingly, the slower-than-expected manufacturing expansion printed though October (prelim) PMI numbers and the ECB Draghi's harsh comments on Euro-zone banks' fragility hardly affected the euro. "Banks do need to fail to prove credibility" of the stress tests said Draghi; EUR barely blinked.
Mexico Rate Decision
At today's second-to-last rate decision of 2013, its widely anticipated that the Banxico will further reduce rates. The question outstanding, is by how much and level of dovishness in the accompanying statement? We are in line with the market in expecting 25bp (following September 25bp surprise cut) to 3.50% rather than the more aggressive 50bp. It's true that economic data has begun to soften (retail sales and auto production are noticeable weak spots) and tropical storms that hit Mexico will certainly have a negative effect on growth. In addition the MXN strong rally could tip the MPCs hand. However, a large cut of 50bp would be seen as slightly overkill considering a slowdown has been observed globally and there are still bright spots in economic activity. Despite the rising expectations of a 50bp cut we still with 25bp is more likely and expect a less then dovish statement (which should equal further USDMXN selling).
With a clear downward trajectory in US labor market and slowdown in housing market (plus continued US political gridlock and New Fed Chairman), shifting our expectations on Fed tapering to March 2014 seems realistic. Low US bond yields and FX volatilities would indicate that higher-beta and EM currencies should profit longer from cheap funding environment. Softness in USD is likely to continue in the mid-run
Event of the Week was NFP release
The week has been dominated by surprisingly weak US nonfarm payrolls in September. The unexpected weakness in US jobs data triggered a sharp price action. Especially given that the US government shutdown in October has not been taken into account. We believe that shifting our Fed tapering expectations to March 2014 is realistic at the current economic setting. USD broadly extended weakness and shifted FX prices to fresh levels. Low US yields and the extension of the cheap funding environment should continue to weigh on USD. DXY hit 79.081 just a stone's throw from the year low of 78.918; we see further room on the downside. As for today US durable goods orders we should see the strongest read in the last three months. The boost is expected to be attributed to large aircraft orders in September. While tapering consensus is around March there is room for this date to be pulled in if data starts to improve.
EUR Gained Momentum
The major shift has clearly been in the euro cross. EURUSD traded to fresh year-high of 1.3825 and is expected to develop upwards. Yet regarding the technical indicators, EUR purchases have been too massive and too fast pushing the 14-day RSI (74%) in the overbought zone, and the pair trades above the upper-Bollinger band (1.3784). We believe that a corrective downside move should be healthy and generate dip-buying opportunities above 1.3695/1.3700 bid zone. Moving forward, the weakness in USD is likely to add some more gains to EURUSD. Interestingly, the slower-than-expected manufacturing expansion printed though October (prelim) PMI numbers and the ECB Draghi's harsh comments on Euro-zone banks' fragility hardly affected the euro. "Banks do need to fail to prove credibility" of the stress tests said Draghi; EUR barely blinked.
Mexico Rate Decision
At today's second-to-last rate decision of 2013, its widely anticipated that the Banxico will further reduce rates. The question outstanding, is by how much and level of dovishness in the accompanying statement? We are in line with the market in expecting 25bp (following September 25bp surprise cut) to 3.50% rather than the more aggressive 50bp. It's true that economic data has begun to soften (retail sales and auto production are noticeable weak spots) and tropical storms that hit Mexico will certainly have a negative effect on growth. In addition the MXN strong rally could tip the MPCs hand. However, a large cut of 50bp would be seen as slightly overkill considering a slowdown has been observed globally and there are still bright spots in economic activity. Despite the rising expectations of a 50bp cut we still with 25bp is more likely and expect a less then dovish statement (which should equal further USDMXN selling).
With a clear downward trajectory in US labor market and slowdown in housing market (plus continued US political gridlock and New Fed Chairman), shifting our expectations on Fed tapering to March 2014 seems realistic. Low US bond yields and FX volatilities would indicate that higher-beta and EM currencies should profit longer from cheap funding environment. Softness in USD is likely to continue in the mid-run
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