DAILY FX UPDATE  GLOBAL FX STRATEGY  YIELDS COLLAPSE & MARKET PUSHES OUT FED TIMING Tuesday, October 14, 2014 

GLOBAL FX STRATEGY DAILY FX UPDATE Tuesday, October 14, 2014 CAMILLA SUTTON, CFA, CMT Chief FX Strategist, Managing Director T.416.866.5470 camilla.su on@sco abank.com YIELDS COLLAPSE & MARKET PUSHES OUT FED TIMING  USD rallies as flows shi away from Europe and into safe havens.  USD—no data today; but markets are vola le.  US yields collapse with the 2‐year at 0.37% and 10‐year at 2.19%; mar‐
ket vola lity shi s drama cally higher with the VIX at 2‐year highs.  Market pushing out Fed expecta ons—now out to October 2015.  CAD is weak, flir ng with its ytd low; no data today but CPI on Friday.  EUR is weak, retracing all of Monday’s gains, as CPI is so in France, Italy and Spain; and German ZEW (investor conf) disappoints.  GBP drops—CPI disappoints, pushing out BoE expecta ons.  GBP technicals turn bearish—opening up a test down to 1.5730.  SEK collapses almost 2% as CPI falls to –0.4%y/y & Riksbank strikes uncertain tone. Expect a test back up to October high of 7.2980.  NOK drops 1.3% as CPI disappoints and oil prices trend lower.  JPY is strong, benefi ng rising market vol and safe haven flows.  AUD is weak as fundamentals and carry but s ll within recent range.  CNY rallies to new high; CPI to be released at 9:30pm EST. FX Market Update ‐ Markets have drama cally shi ed course over the last week, driving vola lity substan ally higher, on the back of a deceler‐
a on in the outlook for global growth and infla onary pressure. Data prints over the last two days have added to these fears, driving a wave of safe‐haven USD buying. Accordingly the USD is strong, but on the back of safe haven. There is no fundamental data today or Fed speech‐
es, but markets are entering the NA open on nervous foo ng. C.S. Disappoin ng infla on or an accelera on in disinfla on and for a few countries more entrenched concerns over defla on are weighing heavily on markets. Today’s releases were par cularly concerning, for headline CPI, Sweden dropped to –0.4%y/y, France fell to 0.3%y/y, Italy to –0.1%
y/y, Spain to –0.3%y/y and the UK dropped to 1.2% (see chart). Low lev‐
els of infla on (and in some cases defla on) warn of significant slack in the economy and reinforce the doomy news delivered on the global growth outlooks last week and over the weekend. Falling commodity prices, reac ng to falling growth and therefore commodity demand es ‐
mates are depressing the outlook for infla on further. Accordingly fore‐
casts for central bank hiking cycles are being pushed out; while global bond yields shi back to their lows. C.S. For the USD the fundamentals are shi ing—a drop in global growth outlook, a decelera on in the pace of infla on and rising market vola li‐
ty (note that the S&P VIX has rallied to fresh two‐year highs) have all helped to push a re‐pricing in Fed interest rate hike expecta ons. At the beginning of September the market expected the Fed to enter its hiking cycle in July 2015; whereas the pricing for the first hike has now been pushed out to October 2015—a significant shi in a month and a half (see top chart). In addi on, the U.S. 2‐year yield has dropped down to a five‐month low and the 10‐year yield is down to a 16‐month low of 2.19%. Typically this would be USD bearish; however the USD has rallied significantly against all the majors since the beginning of September. This is for several reasons: 1) the U.S. rela ve growth outlook is strong, EXPECTATIONS FOR FED HIKES ARE PUSHED OUT 0.50
Pct points priced in to Fed Funds futures 14‐Oct‐14
2‐Sep‐14
0.25
0.00
Dec 2014
Apr 2015
Jul 2015
Oct 2015
Source: Bloomberg & Sco abank FX Strategy UK INFLATION TRENDS LOWER AND LOWER Source: Bloomberg & Sco abank FX Strategy GBP TECHNICALS TURN BEARISH Source: Bloomberg & Sco abank FX Strategy GLOBAL FX STRATEGY Tuesday, October 14, 2014 especially compared to Europe, Japan and even the U.K. driving flows towards the safer haven USD. C.S. USDCAD (1.1245) • CAD is flir ng again with its lows and is down 0.5% since yesterday’s close. Moun ng fears over a deteriora on in global growth are weighing heavily on the pro‐cyclical CAD. In USDCAD terms, it is once again flir ng with a break above its year‐to‐date high of 1.1279 from March 2014. USDCAD tried early in October to break above but failed today it is making its second a empt; making it a pivotal level this week. There are no fundamental releases expected today; with the week’s highlight on Friday (CPI). USDCAD short‐term technicals: bullish—in a new a empt of the ytd highs of 1.1279; a break above opens up further upside, likely to 1.1500; however another failure opens up a more sus‐
tained move back to 1.1100. C.S. EURUSD (1.2650) • EUR is down 0.8%, reversing all of yesterday’s gains, on the back of disap‐
poin ng fundamental releases. Infla on was low and disappoin ng in most countries and Ger‐
man ZEW (investor confidence) dropped unexpectedly to 3.2 on the current situa on, a 4‐year low, and –3.6 for expecta ons, a 2‐year low. The fundamental deteriora on in the outlook for the Eurozone is concerning. EURUSD short‐term technicals: mixed—technical EUR signals are s ll providing a conflic ng out‐
look, sugges ng there is be er risk reward elsewhere. Support lies at the recent low of 1.2501 while resistance is at 1.2800. C.S. GBPUSD (1.5925) • GBP is weak, down 0.9% and trading to a fresh one year low. The catalyst was a disappoin ng set of infla on data, with CPI falling to 1.2%y/y on headline, 1.5%y/y on core and PPI highlight building downstream defla onary pressures. Accordingly, the expecta ons for a BoE interest rate hike is being pushed out farther into 2015 and the 2‐year yield has dropped dra‐
Oct 14, 2014
TECHNICALS: BUY/SELL SIGNALS AND PIVOT LEVELS
30 Day Hist Vol
USDCAD
8.0
EURUSD
9.4
GBPUSD
8.3
USDCHF
9.7
USDJPY
8.3
AUDUSD
11.5
USDMXN
8.5
DXY (USD index)
7.3
EURCAD
9.6
GBPCAD
8.0
AUDCAD
9.0
CADMXN
6.6
BoC Noon Rate
Spot
MACD
1.1246
1.2655
1.5926
0.9543
106.82
0.8727
13.46
85.70
1.4233
1.7911
0.9815
11.96
1.1177
buy
buy
sell
sell
sell
buy
sell
sell
buy
sell
buy
sell
9 & 21‐
day MA
buy
sell
sell
buy
sell
sell
buy
na
buy
sell
sell
sell
DMI
RSI
buy
sell
sell
buy
sell
sell
buy
buy
buy
sell
sell
buy
63
41
31
58
43
39
57
59
52
43
45
44
Pivot 1st Support
1.1191
1.2594
1.5854
0.9483
106.45
0.8649
13.40
85.24
1.4131
1.7856
0.9711
11.92
Pivot 1st Resist.
1.1280
1.2742
1.6062
0.9590
107.40
0.8809
13.50
85.99
1.4315
1.8013
0.9893
12.03
ma cally down to a 7‐month low. A so ening in the economic outlook and an expected so ening in the BoE’s tone is likely to add further near‐term down‐
ward pressure to GBP. The near‐term risk is tomorrow’s employment data, expected to show an unemployment rate of 6.1%. C.S. GBPUSD short‐term technicals: bear‐
ish—most studies turn back to GBP bearish, with the MACD genera ng a fresh sell signal, spot breaking to a new low and through the 50% Fibo of the Jly 2013 to July 2014 rally (see chart). A break below 1.5900 opens up a test down to 1.5800; however firm support doesn’t appear un l the highs from June 2013 at 1.5730. C.S. USDJPY (106.90) • JPY is flat to yester‐
day’s close, having traded to one month highs (USDJPY one month lows). There were no data releases, but a search for safe havens as the VIX has rallied up to 2‐year highs has helped support JPY and turn traders a en on away from the fundamental story and towards its safe‐
haven characteris cs. C.S. USDCNY (6.1250) • CNY traded to a fresh 7‐month high. Recent Chinese data has been encouraging with exports rising to 15.3%y/y and imports rising to 7.0%y/y; however the upcoming release of CPI, FDI and new yuan loans are the core risk and important for both AUD and CAD. C.S. Source: Scotiabank & Bloomberg
Suggested Reading Monetary policy—when will they learn?, R. Avent, The Economist (October 14, 2014) ‐ The sensible course is to keep pushing un l the econo‐
my is well clear of danger. If infla on gets up to 3% or 4%... well, there are far worse things; and the response is simple: ghten policy. Bond market convinced Fed infla on goal elusive this decade, D. Kruger, BBG (October 14, 2014) ‐ When it comes to spurring infla on in the economy, the bond market is becoming convinced that the Fed has almost no chance of achieving its 2% target before the end of the decade. WTI extends drop from 22‐month low as demand slows, R. Rowling, BBG (October 14, 2014) ‐ WTI oil extended its rout from the lowest price in 22 months a er the Interna onal Energy Agency said oil demand will expand this year at the slowest pace since 2009. 2
GLOBAL FX STRATEGY Tuesday, October 14, 2014 TODAY'S RELEASES & SPEAKERS
Time Country Release
Period Consensus
(EST)
21:30
CH PPI YoY
Sep
‐1.5%
21:30
CH CPI YoY
Sep
1.7%
00:30
JN
Industrial Production MoM
Aug F
‐‐
00:30
JN
Capacity Utilization MoM
Aug
‐‐
02:00
GE
CPI EU Harmonized MoM
Sep F
0.0%
02:00
GE
CPI EU Harmonized YoY
Sep F
0.8%
02:00
JN
Machine Tool Orders YoY
Sep F
‐‐
03:00
EC
ECB Pres. Draghi speaks at statistics conference; details unknown
Sep
‐‐
04:00
NO Trade Balance NOK
04:30
UK Average Weekly Earnings 3M/YoY
Aug
0.7%
04:30
UK ILO Unemployment Rate 3Mths
Aug
6.1%
04:30
UK Employment Change 3M/3M
Aug
30K
CONTACTS ‐ GLOBAL FX STRATEGY Please contact authors directly to be added to distribu on lists Camilla Su on, CFA, CMT Chief FX Strategist, Managing Director T.416.866.5470 camilla.su on@sco abank.com Eric Theoret, CFA, CMT FX Strategist (G10), Associate Director T.416.863.7030 eric.theoret@sco abank.com Last Significance
‐1.2%
2.0%
‐1.5%
‐0.8%
0.0%
0.8%
34.8%
med‐high
HIGH
med‐high
med
med‐high
med‐high
med
HIGH
med
HIGH
HIGH
HIGH
22.4B
0.6%
6.2%
74K
Eduardo Suarez Senior FX Strategist (LATAM), Director T.416.945.4538 eduardo.suarez@sco abank.com Sacha Tihanyi Senior FX Strategist (ASIA ex Japan), Director T. 852.2861.4770 sacha. hanyi@sco abank.com IMPORTANT NOTICE and DISCLAIMER: This publica on has been prepared by The Bank of Nova Sco a (Sco abank) for informa onal and marke ng purposes only. Opinions, es mates and projec ons contained herein are our own as of the date hereof and are subject to change without no ce. The informa on and opinions contained herein have been compiled or arrived at from sources believed reliable, but no representa on or warran‐
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