G10 FX Weekly: GBP (Eventually) Lower, USD Rangebound, Be Patient into Year-End

Summary

• Markets are chopping around in ranges, with the November highs/lows across the G10 FX and rates space to contain price action into year-end.
• We still have a bias to see GBP trade lower but think patience will be key to establish the exposure at better levels.

Market Implications

• We would like to look at short GBP positioning in pairs other than GBP/USD and EUR/GBP.
• We do not think that the USD will breakout to the downside before year-end. Instead, we think the USD will range-trade through the rest of this year, with the November high/low in the US Index (DXY) to contain the index.

Introduction

This month has seen some wild price action in the G10 currency space.

The USD has retraced about 50% of its July-October rally, surprising many market participants in the process. Consolidation will be the key theme as we close out the year for the USD.

GBP has been our favoured short for quite some time, and we continue to have a bearish bias for the pound. We think, however, that we will see better levels to initiate shorts. In the meantime, patience is called for.

GBP Patience Is Needed – Waiting to Turn Short

Bearish GBP is our highest-conviction view, but patience is required to initiate new short positioning. We have previously advocated short GBP/USD and long EUR/GBP, both of which still appeal to us.

Beyond these two frequently traded pairs, we consider other GBP crosses. Many are in the middle of multi-month ranges and therefore at sub-optimal levels to enter trades. With patience, however, we think there will be attractive opportunities to go short:

• GBP/AUD could be one of our most favourable trades. However, we wait for better levels to initiate positioning. Since early September, GBP/AUD has been stuck in a ~1.8950/1.9350 range, broadly drifting sideways (Chart 1). We want to monitor the price action and either sell nearer the top of the range or sell a break of the lower end.
• GBP/NOK is trading between ~12.90 and ~13.90, a range that extends back to late May (Chart 2). The pair is currently trading at ~13.45, very near the middle of the six-month range. It traded near the top of the range earlier this month and has since pulled back about 3%. However, we see better value being long NOK versus SEK – find our NOK/SEK outlook and trade plan here.
• Like GBP/AUD, GBP/NZD could be one of our most favourable trades given our current G10 biases. Since early September, the pair has traded sideways within a ~2.03/2.10 range, currently trading near the middle at 2.0750.

Time to Catch the Falling (USD) Knife? Not Yet – Remain Sidelined

The one-way traffic in USD, which dominated trading from mid-July to early October, has now halted. So far this month, the DXY is down ~3.4%. As we wrote last week, this move was probably overdue and so perhaps unsurprising.

However, it clearly still caught the market off-guard, and we think that part of the reason for the sharp USD slide was crowded long positioning. The DXY has retraced roughly half of its July-October ascent in three weeks.

Fading USD weakness this month has been like trying to catch a falling knife, and there may be more downside before the DXY finds its feet. We do not think this necessarily means the DXY will unwind all the gains since July, nor that we are starting a multi-month sharp USD sell-off. Rather, we expect additional, modest USD downside in the coming weeks as it trades to range lows and settles.

Never a Dull Moment in USD/JPY – Remain Neutral

USD/JPY has been one of the more attention-grabbing G10 pairs in this month’s USD reversal. Since peaking (and virtually double topping) near 152 this month, USD/JPY is down about 1% (after being down almost 4% earlier this week). Almost all that move occurred in the past six trading days.

We recently warned of MoF intervention to support JPY. Ultimately, broader USD weakness did the MoF’s work for it. As with the broader USD, we see more downside for USD/JPY before the pair settles, likely at 145-146.

We have been neutral JPY since we voiced our intervention concerns. We remain neutral USD/JPY.

Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)