We do think that investors should differentiate among the different G10 risk correlated currencies. Among the G10 smalls, the two scandi currencies could be the outperformers if the upcoming inflation data strengthens the case for less easing. At the same time, investors should remain cautious on CAD and NZD ahead of the BoC and RBNZ policy announcements. With a rate cut already priced in, it would take dovish guidance by the RBNZ to see NZD significantly weaker. AUD could struggle to perform as well ahead of the Australian labour market data with markets particularly sensitive to potential disappointments after the weaker than expected Q2 GDP print last week.
Turning to the majors, the safe havens EUR, JPY and CHF lost some ground at the start of the week. The single currency remains particularly vulnerable after the dovish September ECB meeting. The biggest beneficiaries should be the USD and GBP. Indeed, more evidence that policy makers outside the US and the UK are taking steps to avoid sharp risk selloff could increase the chances for a Fed hike before long and a BoE hike, next year. While some cautiousness on GBP could prevail ahead of the BoE meeting and minutes release, we think that now may a good time to re-enter short EUR/GBP positions. Risks for EUR/USD should remain on the downside as well.
Going forward, any recovery in risk could be fraught by several risks. A cautious recovery in market risk appetite will make it easier for the Fed (and the BoE) to hike rates before long. Tighter monetary conditions especially in the US could encourage further outflows from the EM and risk-correlated G10 currencies. In addition, even if the PBOC refrains from further competitive devaluation, this need not stop other CBs from weakening their currencies. The September ECB meeting is the latest example of that. We think that the BoJ is not that far from announcing more stimulus. Concerns about competitive devaluation will continue to add to fears of slowing growth and disinflation.
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