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The US debt ceiling and China’s Evergrande's debt will drive FX direction

The US debt ceiling and China’s Evergrande's debt will drive FX direction

US dollar: Weekly Trading Range (92.70 – 93.70)

Spot
DXY 93.37
Week ahead bias
Bullish
Weekly range
92.70 - 93.70
1 month target
93.00
  • The greenback is starting the week well supported. Most analysts were expecting the USD to rally given the hawkish Fed Dots that showed a tightening cycle well above anything priced in money markets. Highlights this week will be a whole host of Fed speakers attending conferences on both sides of the Atlantic. It maybe difficult for them to surprise the market now, given that Powell made it reasonably clear that tapering will be announced in November, completed next summer and perhaps making the case for the first Fed hike as early as September 2022. US data this week focuses on consumer confidence, personal income and the September ISM Manufacturing.
  • In addition to the Fed, a fragile risk environment could also lend the dollar some support. The Evergrande debt resolution story is far from clear, and we’ll also hear more about the US debt ceiling this week. October 1st is the deadline to approve a stop gap funding bill, though mid-October seems to be the more realistic deadline for when the US Treasury will have to start scaling back activities.

Canadian Dollar: Weekly Trading Range (1.2650 – 1.2800)

Spot
USD/CAD 1.2696
Week ahead bias
Mildly Bullish
Weekly range
1.2650 – 1.2800
1 month target
1.2500
  • The loonie has been on an upwards trajectory since Monday, benefitting both from the rally in oil prices and some unwinding of political risk premium after Canada’s federal election. While the election results have sent Canadian politics to the status-quo, markets are pricing in several positives including pressures from the NDP to extend fiscal stimulus and also endorse the Bank of Canada’s policy normalization plans. The risks related to the Liberal’s minority government are not absent- they include a stronger opposition to pipeline projects and likely higher taxation to banks. These risks however are not immediate and may take a few months to surface.
  • This week Canada sees the release of July’s GDP numbers. Growth has been the missing piece in an otherwise very positive Canadian data flow for CAD. The surprise 2Q contraction in activity was the main reason for the Bank of Canada to pause tapering. However, all signs point to the BoC to start tapering again in October. Given the current dynamics, the CAD may stay among the best performers this week.

Euro: Weekly Trading Range (1.1670 – 1.1760)

Spot
EUR/USD 1.1709
Week ahead bias
Mildly Bearish
Weekly range
1.1670 – 1.1760
1 month target
1.1700
  • Today should see the German election results take shape. The elections have not had much impact on the EUR so far and determined the EUR direction will be quite challenging. Most analysts suggest that a left-wing government could be poorly received by the EUR, while a surprise CDU/FDP coalition could be well received.
  • Fundamentally, this week’s focus will be on inflation and what the ECB plans to do about them. Friday sees the release of September Eurozone CPI – expected to rise 3.3% YoY and probably trigger a fresh concern from the ECB hawks. The week also contains many speeches from the ECB big-hitters, including Lagarde and Lane. A more hawkish ECB story may be the best hope for EUR/$ to be holding above 1.17 by the end of the week.

British Pound: Weekly Trading Range (1.3570 – 1.3740)

Spot
GBP/USD 1.3677
Week ahead bias
Mildly Bearish
Weekly range
1.3570 – 1.3740
1 month target
1.3700
  • The British Pound started the past week relatively weaker than its peers but managed to recover losses after the Bank of England sent some hawkish signals in its policy announcement. In particular, two points appeared to have a more hawkish than expected tone: a) the acknowledgment that some recent developments have strengthened the case for “moderate tightening”; b) the fact that one MPC member voted against maintaining the same asset purchase target. While the UK economy is still set to face a number of headwinds this winter, the MPC appears divided around the threat that higher inflation is posing.
  • Most expect the GBP to become increasingly sensitive to data as any signs of weakness in the UK economy (and especially in the jobs market) could make investors scale back their views of a Q122 hike. That said, the week ahead is very light on data and as such the GBP is likely to take direction from sensitivity to global risk aversion with incoming news from China to drive most of the pound moves.

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