Quiet Week And Risk Off: What Is The Trade ?

Credit Agricole:

The thin data calendar this week could mean that swings in the market risk sentiment will continue to dominate the G10 FX markets. Indeed, risk aversion could linger in the absence of policy measures to bolster investors’ confidence and we remain cautious in our outlook for risk-correlated and commodity currencies.

In addition, in the case of antipodeans, potential disappointments from the Chinese trade balance figures and monetary aggregates as well as the Australian labour market data, could keep the selling pressure on AUD and NZD in place for now.

While the latest bout of risk aversion burnished JPY safe haven appeal, we continue to expect limited gains from here given the BoJ’s readiness to act in response to further escalation of the market risk aversion and/or unwarranted FX appreciation.

Even if the market risk aversion remains the dominant theme this week, some of the data releases and the events could attract considerable attention. In particular, the US retail sales and the Fed speakers should be of interest.

We think that the uncertainty going into the retail sales is considerable, so that markets looking for a subdued print during the holiday season maybe in for a positive surprise. In addition, we suspect that the Fed speakers during the week will try to bolster market risk sentiment by reiterating their confidence in the US recovery in the face of lingering global growth threats. This could come across as hawkish and support USD.

GBP was among the majors that have underperformed greatly at the start of the new year. We believe that the upcoming IP and MP data releases as well as the January BoE meeting could help prop up GBP. Indeed, the latest currency underperformance was related to growing concerns about the impact of a potential Brexit. We think that the latest selloff seems somewhat premature given that there is still no date for the EU referendum and that the supporters of Brexit are by no means in majority. We think that evidence that the BoE view on the economy has changed little of late could trigger a round of profit taking by those betting on more MPC dovishness given the latest data and growing Brexit fears.

Last but not least, investors will focus on the release of the ECB minutes. The ECB speakers we had since the December meeting, which left many disappointed justified the lack of more decisive easing measures. We think that the minutes will highlight that the decision was controversial with the ECB dovish lean centred around the President still very much there. With the Eurozone inflation expectation starting to correct lower in response to the disappointing December flash HICP estimate and the persisting selloff in the global commodity prices, markets could start betting on more easing to come and sell EUR.