USD: The sell-off will not turn disorderly - EURUSD maintaining above 1.50 for long is unlikely assuming that the equity market bull doesn’t go into overdrive. A very weak Christmas shopping season out of the US is likely to remind the world that the US consumer is out for the count. Seasonality is against the greenback if we are to take recent history as a guide, so picking entry points may be a challenge, but we could see a bottom for the greenback in Q4.
EUR: The ECB has turned very dovish relatively to its formerly brave rhetoric. It is unjust to watch as the euro has appreciated against the likes of the renminbi over the last six months - as the world’s imbalances will not be aided by continued knee-jerk reserve diversification and EURUSD buying. The EUR has already been extraordinarily weak vs. the AUD and other riskier currencies, so it may not be a “high beta” weakling if the going gets tougher for risk appetite at some point in Q4, but it could weaken against GBP, JPY and the USD if we see a shift in the market paradigm in Q4.
GBP: The tendency may be for the pound sterling to strengthen relative to the higher beta currencies in the G10 if risk appetite begins to finally wane at some point during Q4, but at the same time to weaken versus the JPY and the USD. A pair like GBPAUD is certainly at remarkable, near multi-decade low, and we wonder if this kind of action within the G-10 is getting overstretched. JPY: The market will have a new government to try and acquaint itself with. JPY seems likely to remain in solid shape as long as interest rates remain very low and it is unlikely that the BoJ indulges in JPY-weakening attempts like it has in the past, especially with the change of political guard. However, even a modest rally in rates combined with another extension up in equities could mean bouts of weakness in Q4. Eventually we would expect the JPY to show signs of more durable firming against the commodity currencies.
CHF: The Swiss franc has lost its correlation with risk appetite, and may have received a boost from the persistent rally/resilience in bonds and the stabilisation of key CEE currencies (due to their heavy indebtedness in CHF-denominated loans) over the last quarter. Does that make it a surprisingly risky currency if the pendulum swings the other way now? A CHF forecast is also complicated by the cat and mouse game of determining when and where the SNB will intervene. GBPCHF will be an interesting trade to watch to see if it can turn the corner to the upside: while the market is punishing the pound for its QE measures, we must also remember that Switzerland is also doing its own form of QE through direct currency intervention.
CAD: The BoC is talking down CAD as a threat to the recovery. Regardless, CAD is mostly bound up with risk appetite and the global recovery scenario. The currency’s recent strength is not helping Canada and the country is still very dependent on its neighbour to the south for much of its economy, and with end demand expected to be down for the count for years, it is tough to see CAD outpacing the broader market for the longer term. The current account is headed in the wrong direction and the strong CAD will not help that development. We also have the prospect of yet another election as the shaky Harper government may not survive the quarter. CAD could top out vs. the USD down within a stone’s throw of parity, but then we could see it weaker against the market.
NZD: AUD and NZD have become the poster children for the resurgence in confidence that things are looking up for the global economy. We would give NZD the edge over AUD in Q4, but NZD has rallied too much and the central bank will begin to fight the appreciation tooth and nail, as the stronger currency is the last thing the country’s nascent recovery needs.
AUD: The Chinese recovery has been a key for Aussie strength. If China’s withdrawal of credit stimulus begins to bite in Q4, then it may become apparent that an AUDUSD north of 0.8500 and GBPAUD below 2.000 is already pricing Australia for perfection. There are a few signs in the Australian data that the speed of the recovery is faltering a bit, perhaps as the already announced stimulus measures are petering out. Q4 could be the beginning of a rockier road for the currency and the RBA’s actions will be critical with the market’s expectation that it will be one of the major central banks to hike.
NOK: The Norwegian krone traded sharply stronger in the quarter as oil prices rose and the market took note of the Norges Bank’s more hawkish posture. NOK could continue to perform well vs. a shaky EUR and relative to other due to its unmatched balance sheet when the world is worrying about currency devaluation and due to its commodity exposure if the risk run-up barrels ahead more than expected in Q4. EURNOK may be on a path to 8.00 by mid 2010.
SEK: has performed very well with the recovery in risk appetite and the bailout of Eastern European countries - particularly Latvia. As long as the “everything will be bailed out” mentality holds, the SEK is likely to shine during Q4 and EURSEK could dip below 10.00 at times in the quarter. A blowout of EM risk spreads and decline in equities would derail the SEK recovery. Equity and risk bears should consider long USDSEK positions on dips. The Riksbank has been one of the more aggressively dovish Central Banks - interesting that the market has largely ignored this in favour of risk indicators.