FX Daily: Carry And Conviction

Higher-yielding currencies are starting to look more attractive, as speculators continue to bet on the dollar's decline.

USD: Speculators add to their short dollar positions

The latest CFTC points to speculators generally adding to their short dollar positions – even though positioning is starting to become extreme. As we discuss in the G10 FX Week Ahead, we think key inputs to the dollar story this week will be the FOMC minutes released on Wednesday (will they provide any clues to a change in strategy in September?) and also whether we see a continued correction in the US Treasury market. Events over the weekend do not seem to have changed the markets’ view of the dollar, where we’ve seen: (i) US-China trade talks delayed, (ii) continued wrangling over the US postal system ahead of November’s election and (iii) rolling power blackouts in California on the back of a heatwave. We would also say that carry seems to be making a comeback in the FX narrative, where top performers vs the dollar over the last week have been Norway's krone in the G10 space and the Mexican peso in the emerging markets space. As per our week ahead, we see DXY breaking to a marginal new low this week. (UDN)

EUR: A good alternative

EUR/USD continues to stay bid – largely on the loss of confidence in the dollar. At the end of this week we’ll get to see the eurozone August PMI flash releases. These should still be constructive, and any renewed lockdowns may only re-appear in the September data. We haven’t heard anything from the European Central Bank yet over the stronger euro (next ECB meeting 10 September), but we expect the weaker dollar to be the dominant theme into the November election – thus any ECB remarks will only slow, not reverse the move. It’s a quiet week for European data and the central banking highlight will be the Norges Bank meeting on Friday. EUR/USD could easily drift back to 1.1910/15 in quiet markets today. (FXE)

GBP: Brexit talks resume in Brussels tomorrow

The highlight of a quiet week may be the next round of Brexit talks which take place in Brussels tomorrow. The latest headlines on this topic warn that there may be delays to financial equivalence discussions, meaning possible delays for UK banks in securing pan EU market access rights. There is still much uncertainty here and despite the Bank of England's Andy Haldane talking up UK recovery prospects, we still prefer EUR/GBP to be heading to the 0.91/92 area into September. (FXB)

ZAR: One high yielder we don’t like

The South African rand has been enjoying the better external environment, yet it is a high yielder which we would not back. The local administration has come under pressure to do more to support the economy and any further rate cuts could take real rates into negative territory. The recent IMF aid package means that debt sustainability will come back onto the agenda later this year. A tighter fiscal, looser monetary mix will be a bearish one for the rand.