Yen on an explosive trajectory

The G-10 rundown

USD – the US dollar on its back foot even as the entire US yield curve lifts higher as the new widening of yield spreads doesn’t seem to be a source of strength. The USD could run a bit lower given positioning, but eventually, some yield convergence would seem necessary to see further declines. Hard to see how the Federal Open Market Committee surprises next week unless it is in a dot plot shift higher, and the market seems to be absorbing higher US yields anyway.

EUR – the euro clearing the 1.1725-50 area in the EURUSD chart and having a look at flash Eurozone PMI’s this morning (a brief test above 1.1800 was brushed back after the French survey came in a bit soft, but these may not hold back the euro this morning). There may be room for the EURUSD to run higher into the 1.2000 area assuming the FOMC meeting next week gives no surprises.
 
JPY – the JPY driver is clear, but the action may prove very treacherous and could end in a climactic reversal, either because yields stop rising or the BoJ offers hints on policy at some point. Consider the ugly place that the Bank of Japan finds itself in as outlined in this Bloomberg piece. 

GBP – sterling headline risk in constant evidence here as the Brexit negotiations are stalled hopelessly on the Irish border issue and sterling has backed down sharply after surging again yesterday on strong Retail Sales data. Next weekend sees the Tory party conference, another key test of the political temperature.

CHF – the Swiss franc is sideways, a bit surprising given the backdrop, but we did have a slight widening of Italy-core spreads as the FSM’s leadership is not happy with the amount of funding in budget proposals for issues it champions.

AUD – the AUDUSD chart bumping up against the descending channel top – more CNY strength, strengthening risk appetite and commodity strength needed to extend the squeeze – perhaps to the 0.7500 level, though we haven’t changed our position on longer-term negative risks.

CAD – USDCAD poised at the last shreds of local support ahead of Canada’s latest CPI print this afternoon. An extension of the sell-off potentially opens up considerable open space on the chart toward 1.2500 or lower.

NZD – the kiwi pressing a bit stronger against the Aussie even as rate spreads extend in the latter’s favour – this has us scratching our head a bit and with limited expectations for NZD outperformance even if the pair breaks below the 1.0850-00 area. The RBNZ set to meet next Thursday, just a few hours after the US Fed.

SEK – the strong Swedish krona is one of the better trends going at the moment as EURSEK nears the first major support levels in the 10.25-20 area, though there may be potential for further extension toward 10.00-10 if the mood in risk appetite remains positive.

NOK – as noted above, we’d be surprised, given the NOK supportive backdrop, to see NOK much weaker here versus the EUR despite the Norges Bank’s lack of hawkish guidance – 9.60-65 is the pivot zone that proves that point one way or another.

Upcoming Economic Calendar Highlights (all times GMT)

• 1230 – Canada Aug. CPI
• 1345 – US Markit Flash Sep. PMI