Depeche Mode's David Gahan wanted people to enjoy the silence

EUR: PMIs unlikely to turn the tide for the euro

• The contradicting news flow on trade negotiations continues to generate market noise but it can neither trigger a major correction in the supported risk environment nor fuel a decisive rally in pro-cyclical assets. The dollar did lose some momentum after a two-week run, but is still lacking a tangible negative catalyst, so it may be able to retain most of its recent strength in the coming days.Looking at the US calendar, the FOMC minutes (from the October 30 meeting) will likely attract most attention. However, the substantial flow of Fedspeak in the past week (e.g. Powell’s testimony) may have diminished the surprise potential of the minutes, which should anyway confirm the well-established notion that the Fed will pause at least till the end of the year – and probably well into 2020.
• On the euro side, the focus will be on preliminary PMIs out on Friday. In line with our economists’ view, the consensus is positioned for a marginal rebound in the battered manufacturing gauge, possibly supported by a mitigated downside risk stemming from trade wars. However, we have seen how minor improvements in eurozone data are still unable to drive sustained upsides in EUR/USD, which may, therefore, go back to testing the 1.10 support in the week. A number of speeches by ECB officials (including one by President Lagarde on Friday) complete the calendar, although the Bank’s recent cautious approach when it comes to policy-related statements and Lagarde’s focus on team-building activities suggest little room for fresh policy initiatives and FX market impact. 

JPY: JGB yields under control

• After some recent sharp dislocation, the Japanese Government Bond market looks a little more under control – helped by a rally in US Treasuries. The BoJ probably doesn’t mind the JGB sell-off too much, given its preference to steepen the yield curve and help the local banking system. Barring a surprise break-down in US-China trade negotiations, we see the coming week as a reasonably benign one – meaning that USD/JPY should be range-bound to slightly higher. True the US data has been softening a little, but the industrial slow-down is well-priced and, so far, the US consumer (like consumers elsewhere in the world) is holding up quite well.
• Locally Japan sees October trade data and also the national CPI figure for October. The latter is rarely a market mover and the core rate, expected at 0.4% YoY, is still miles away from the BoJ’s target. Equally, the market doesn’t really believe the BoJ’s threats to take rates more negative – in fact, the BoJ has led the way in the tiering of deposits to protect the banking system from negative rates. In all, we expect a range-bound USD/JPY and the JPY to maintain funding currency status.

GBP: Conservative win prospects appear to be strengthening

• The slew of data in the UK this week failed to drive any move in sterling as markets continue to focus solely on the upcoming general election. In the past few days, the Brexit Party pledged not to contest Conservative Party seats while presenting a candidate in all Labour-held seats. When adding a rising lead of Boris Johnson’s Conservatives in latest opinion polls, investors have been able to cement their expectations around a (market-friendly) Tory majority win. We have recently outlined different election scenarios in “What the UK election means for Brexit”, by the way. All this has allowed GBP to remain supported and may continue to put a limit to any downside in the near future.
• Next week is pretty light in terms of market-moving events. Data-wise, PMIs may point to further manufacturing weakness but should once again have limited market impact; on the political side, the first television debate between Mr Johnson and the Labour leader, Jeremy Corbyn, will be the highlight of the week. The general perception of who comes out as the “winner” may affect some markets expectations, although more opinion polls are probably going to be the major driver of the pound in the next few weeks.

AUD: Back to a dovish mood

• After depreciating more than 1% (vs USD) this week on the back of poor labour data, the Australian dollar is now facing a period without significant data releases. The RBA minutes from the November policy meeting - to be released on Wednesday – will likely reiterate the now familiar “leaving the door open” (for more easing) narrative. However, the latest employment data likely makes the economic assessment in the minutes outdated; hence we're expecting a limited market impact to the release. 
• The uptick in unemployment in October seems to have strengthened the market’s conviction that the next RBA cut is not a matter of “if” but rather of “when”. The next policy meeting is set for 3 December, which seems a bit early for another cut: by that day, the RBA won't have received any more input from hard data so a major deterioration in the external backdrop will likely be needed to prompt an easing move. Markets seem to agree (there's only a 21%implied probability of a December cut) and are leaning in favour of a restart to easing in 1Q20 (February cut 60% priced in), since GDP, inflation and more labour data will be available. For this week, the AUD will, however, continue to lack positive internal drivers and will rely entirely on sustained optimism on trade negotiations to dodge more downside pressure coming from the repricing of rate expectations.  

NZD: The go-to commodity currency

• It is not exactly common to see the Kiwi dollar move in a diametrically opposed direction to that of the AUD. In a week dominated by idiosyncratic stories in the G10 $-bloc, NZD is the big winner, as our expectations that the RBNZ would hold fire (against market expectations) proved accurate. Latest CFTC data was indicating the NZD is the biggest speculative short in G10, and the slump in NZ govies has likely triggered a sizable short-squeezing effect in the currency. However, from the -52% net short positioning (as of 5 November), there’s probably still a long way to go to square short positions, and the positioning advantage is likely to keep playing a role to support NZD rallies.
• Next week looks quite uninspiring for NZD given the absence of market-moving releases, so the trade negotiations will inevitably remain the main the driver. However, we suspect the Kiwi dollar has the possibility to keep outperforming its risk-sensitive peers next week, thanks to its improved rate outlook. In particular, the opposing dynamics in the RBA and the RBNZ rate expectations makes the AUD/NZD 1.0624 100d-MAresistance look very fragile.

CAD: Baby steps towards a BoC cut

• Although net long speculative positions on the Canadian dollar were still on the rise as of last week, the loonie’s momentum dried up in the past ten days and is struggling to recover. The recent dovish shift by the Bank of Canada is preventing CAD to cash in on the supported risk sentiment despite a very appealing carry advantage. With the external backdrop broadly improving, markets will look at next week’s slew of Canadian data to spot any crack in the so-far solid economic outlook that could underpin an easing move by the BoC.
• We see some downside risk stemming from the September retail sales data out on Friday rather than the October CPI - which should continue to indicate that core and headline inflation are both around the central bank’s 2% target. The gauge has dropped in three of the last four months, and another fall may fuel expectations of a BoC cut as soon as December (to which we attach a higher probability than the market’s 20%). As long as markets keep taking “baby steps” to price in BoC easing, the benefit from trade optimism – bar any major breakthrough in US-China negotiations – may continue to be mostly offset by the deteriorating rate outlook.

CHF: Done over by the Italian job

EUR/CHF came off hard this week, which was slightly surprising since it wasn’t a particularly ‘risk-off’ week. Where there was dislocation, it was in the Italian bond market, which seemed to succumb to profit-taking after a strong performance this year. Here the BTP-Bund spread widened about 20bp over the last week or so – although there have been no significant Italian developments to speak of. If that Italian correction is over, then CHF may hand back of some of the recent gains – leaving us slightly bullish on EUR/CHF for the week ahead.

Swiss data is rarely a market mover and we doubt the October trade data and 3Q19 industrial output numbers will have much bearing on CHF pricing. Instead, eurozone PMIs towards the end of the week could provide a slight lift for EUR/CHF if they manage to climb a little on the back of better trade news and easier monetary policy around the world.

NOK: Still helped by oil

• Brent prices remain anchored around the 62$/bll level, which is pairing with the lingering trade-related optimism to underpin the krone’s steady recovery from late-October'sall-time lows. The inflation report this week came broadly in line with expectations and confirmed that core inflation remains slightly above the 2% target. However, with the Norges Bank clearly indicating its intention to pause for an extended period, the impact of data releases remains quite limited given there are no tangible implications for the rate outlook.
• This week will almost entirely be about global risk sentiment drving EUR/NOK movements: the krone’s 6-month correlation with the MSCI World index (a measure of risk appetite) remains the second-highest in G10 (after CAD). Should optimism on Sino-American trade negotiations remain fairly solid, EUR/NOK could pressure the 10.00 level.  

SEK: All about eurozone spillover

• SEK is finishing this week slightly stronger than expected on the back of robust labour data – having been revised after the Statistical Agency revealed the data was flawed. This helped the market cement an expectation of a rate hike, although there still seems to be some room for this to be priced in further. Also stirring EUR/SEK lower was the German GDP readings narrowly escaping a technical recession, contributing to improved euro-area sentiment.
• No major data release in Sweden next week, but we would expect eurozone survey data to have, once again, significant spill-over effects on SEK given the high-beta of the krona to eurozone data surprises. Should, as our economists expect, EZ PMIs display some marginal recovery, and the optimism about trade developments remains mostly intact, EUR/SEK may continue to see limited upside risk in the next week.