Synopsis:

Credit Agricole discusses the near-term potential for EUR appreciation, driven primarily by month-end FX flows and market expectations of a dovish pivot by the Federal Reserve. However, they also note certain challenges that may dampen the fundamental appeal of the single currency.

Key Points:

• Recent EUR/USD Performance: The EUR/USD pair recently reached a five-month high, boosted by supportive month-end FX flows and expectations of a dovish shift in Federal Reserve policy.
• Relative Underperformance of EUR: Despite this recent high, the EUR has underperformed most other G10 currencies, except for the CAD. This suggests that FX investors may have reservations about the fundamental attractiveness of the EUR.
• ECB's Challenges Similar to the Fed: Like the Federal Reserve, the European Central Bank (ECB) is facing difficulties in convincing rate investors that it will not cut rates in the foreseeable future.
• Market Rate Cut Expectations Impacting EUR: Persistent market expectations for rate cuts are eroding the appeal of the EUR's interest rates.
• Supportive Month-End FX Flows: Despite these challenges, Credit Agricole anticipates that supportive month-end FX flows could continue to bolster the EUR/USD in the very near term.

Conclusion:

Credit Agricole's outlook for the EUR in the near term is cautiously optimistic, primarily due to supportive month-end FX flows and dovish Fed pivot expectations. However, challenges like the ECB's struggle to align rate investor expectations and the general underperformance of the EUR in the G10 currency space might limit its fundamental appeal. Overall, while there is potential for further upside in the EUR/USD, underlying market dynamics and central bank policies could impact its trajectory.

GBP/USD consolidated recent gains on Wednesday as it struggles to maintain a foothold above the 1.27, and a combination of the RSI moving into overbought territory - above 70 – and a slight bearish divergence suggests that upside is exhausted.

That said, the trend remains tilted towards further gains should cable hold above its 200-DMA (1.2463).

A slight pushback on rate cuts from Federal Reserve’s, Thomas Barkin, has provided a modicum of support for the dollar, following Tuesday’s surprise dovish comments by the typically hawkish Christopher Waller.

Consequently, attention now turns towards Thursday’s PCE data before finishing up with Chair Jerome Powell’s fireside chat due Friday.
Should Powell provide similar rhetoric to Waller, this would likely prompt a renewed bid in cable, opening the doors towards a test of its 200-WMA (1.2843) in the lead up to the Fed’s December meeting.

For now, a pullback in sterling is likely to be greeted by dip buyers.
Keep in mind that seasonals are bearish dollar heading into year-end and now that Fed hawks are providing scenarios for easing policy, this will only exacerbate the typical trend.

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Synopsis:

Morgan Stanley provides its forecasts for key dollar bloc currencies against the USD for the first quarter of 2024. The bank's outlook takes into account the currencies' regional exposures and their expected impact on relative performance.

Key Points:

• USD/CAD Forecast: CAD is seen as relatively bolstered due to its exposure to the outperforming US economy. Morgan Stanley forecasts USD/CAD to rise only marginally to 1.41 by Q1 2024.
• AUD/USD Outlook: The Australian Dollar (AUD) is expected to fall to 0.61 against the USD. This depreciation is attributed to Australia's economic exposure to China, where growth is presumably weaker.
• NZD/USD Projection: The New Zealand Dollar (NZD) is predicted to find a middle ground, rising to 1.07 against the AUD but slightly underperforming against the CAD.

Conclusion:

Morgan Stanley's forecast for the first quarter of 2024 reflects the varying impacts of regional economic exposures on the USD/CAD, AUD/USD, and NZD/USD currency pairs. The CAD is expected to show resilience due to Canada's proximity to the robust US economy. In contrast, the AUD's exposure to China's economic performance leads to a weaker outlook. The NZD, meanwhile, is seen as balancing between these two dynamics, performing better against the AUD but not as strongly as the CAD against the USD.

• Softer U.S. yields continue to drag the dollar lower, weighing on USD/CAD

• Fed hawk surprises with dovish rate cut talk nL1N3CT1ZN

• However, the pair respects its 100DMA (1.3556) ahead of the 200DMA (1.3517)

• Upcoming CA GDP/jobs report will have a big say on CAD's direction

• Recent data deterioration suggests CAD risks are to the downside

• BoC also has new found confidence that rates are restrictive enough

• USD/CAD weakness has its limits nL1N3CT15N

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Synopsis:

Goldman Sachs provides an analysis of the EUR/USD currency pair, acknowledging a potential shift but maintaining a cautious stance. The near-term direction of EUR/USD is seen as heavily dependent on the upcoming November US jobs report and broader economic factors.

Key Points:

• Turning Point for the Euro: Goldman Sachs recognizes that the Euro has shown signs of turning a corner, but they also note that it is not entirely out of the woods yet.
• Impact of US Jobs Report: The US employment report due in two weeks is pivotal. If it shows a loosening labor market, it could bolster the Euro in the near term, particularly if it leads to expectations of a more accommodative stance in the December FOMC dot plot.
• Limited Room for Euro Area Improvement: Despite potential short-term gains, Goldman Sachs does not see much scope for a more constructive stance from Euro area domestic data as of now.
• Key Risks for the Dollar: The trajectory of the Dollar is seen as contingent on two primary risks: the possibility of faster, non-recessionary rate cuts, and diverging monetary policies.
• Overarching 2023 View: Goldman Sachs' overarching view for 2023 is encapsulated in the phrase “waiting for a challenger.” For a substantial and sustained depreciation of the Dollar, better capital returns in Europe and China are deemed necessary.
• Cyclical Outlook for 2024: As inflation aligns closer to targets in various jurisdictions, the cyclical outlook is expected to become more crucial for policymakers and FX markets. Goldman Sachs believes this scenario still favors the Dollar.
• EUR in Portfolio Strategy: Given the current context and the Euro's recent performance, Goldman Sachs suggests that EUR should predominantly be on the funding side of most portfolios.

Conclusion:

Goldman Sachs' outlook for EUR/USD highlights potential upside but remains grounded in caution. The near-term direction of the pair is seen as heavily influenced by the upcoming US jobs report and the broader economic context. While acknowledging a shift in the Euro's trajectory, the analysis suggests that significant, sustainable gains for the Euro, particularly against the Dollar, would require improved capital returns in Europe and China. For 2024, the emphasis on the cyclical economic outlook is expected to further bolster the Dollar, maintaining the Euro as a funding currency in portfolio strategies.

Synopsis:

Bank of America (BofA) provides its forecast for the USD/JPY pair in 2024, predicting an initial rise to 155 in the first quarter followed by a correction to 142 by the end of the year. This outlook is influenced by expected shifts in US and Japanese monetary policies and the ongoing impact of carry trade dynamics.

Key Points:

• 2023 Carry Trade Impact: The carry trade has been a key driver for the JPY in 2023. Going into 2024, USD/JPY carry remains high.
• Expected Monetary Policy Shifts: The Federal Reserve is anticipated to start cutting rates in June 2024, while the Bank of Japan (BoJ) is expected to end its Negative Interest Rate Policy (NIRP) in January 2024 and implement another rate hike in the second half of 2024. This suggests a convergence in US-Japan monetary policies.
• Lasting Impact of Carry: Despite a predicted decline in the USD in 2024, JPY is not expected to be a favored currency against the USD due to the substantial US-Japan policy rate spread, which is expected to remain above 4% at the end of 2024.
• Outward Investment Trends: The expansion of Japan's NISA program in January 2024 is expected to increase outward investment by retail investors.
• USD/JPY Forecast: BofA maintains its forecast, expecting USD/JPY to rise to 155 by Q1 2024 and then correct to 142 by the end of the year. This movement aligns with the forward rate, with carry compensating for the spot loss implied by the forecast.
• Structural Headwinds for JPY: Factors like Japan's high public debt, persistent outward Foreign Direct Investment (FDI), and retail investors' portfolio rebalancing are expected to keep the JPY weak for an extended period.

Conclusion:

BofA's outlook for USD/JPY in 2024 predicts a significant rise in the first quarter, driven by carry trade dynamics and monetary policy shifts, followed by a correction towards the year-end. The expected rate cuts by the Fed and policy adjustments by the BoJ, coupled with structural factors impacting the Japanese economy, are key elements shaping this forecast. The overall trend suggests a volatile year for the USD/JPY pair, with the JPY remaining weaker against the USD despite potential declines in the latter.

• AUD/USD rallied to 0.66765 overnight then reversed and turned lower

• Lower than f/c Oct. CPI weighed as data may help keep RBA on hold

• US$ rallied overnight to weigh as well; USD/CNH rallied 7.1143-7.1413 on D3

• US$ bounced despite US yield US2YT=RR drop & equity ESv1 gains

• Extension of iron-ore DCIOc2 decline likely added weight on AUD/USD

• AUD/USD hit 0.6614 then opened NY near 0.6620, traded down -0.38% early NY

• Daily RSI diverged & a daily inverted hammer formed, are concerns for longs

• US Q3 GDP (2nd estimate) & its core PCE component are key risks in NY

• Remarks from Fed's Barkin, Mester & Fed's Beige Book are also risks in NY

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• Cable elicits support circa 1.2674 after retreat from 1.2733 (3-month peak)

• 1.2674 was pullback low from 1.2715 Tuesday high. More bids likely by 1.2650

• Offers ahead of 1.2650 capped gains 48 hours ago (1.2644 was Monday high)

• US Q3 GDP data (second estimate) due at 1330 GMT; 5% growth f/c nL4N3CT4ST

• UK consumers increase borrowing at fastest pace in five years nL8N3CU2H6

• BoE's Bailey vows to do 'what it takes' to cut UK CPI to 2% nL8N3CU1J9

• USD/JPY's upside limited by the thick cloud that spans 147.38-149.17

• Tenkan and kijun lines are negative, pointing to a big drop to 146.31 Fibo

• 146.31 Fibo is a 38.2% retrace of the 137.245 to 151.92 (Jul to Nov) rise

• 14-day momentum remains negative, reinforcing the bearish market structure

• USD/JPY Trader TGM2336. Previous update nL1N3CT0FH

• EUR/GBP dips to 0.8646 on softer than expected Spanish inflation data

• Spanish Nov CPI up 3.2% YY vs 3.7% forecast. 0.8646 is low since Oct 17

• Sub-f/c Spanish CPI is boost for doves advocating ECB rate cut in spring

• BoE's Bailey vows to do 'what it takes' to cut UK CPI to 2% nL8N3CU1J9

• 0.8639 (100-day moving average) and 0.8629 are EUR/GBP support points

• Resistance levels include 0.8678 (200DMA) and 0.8696 (GBP/EUR 1.15)

• EUR/USD is now well above 1.0960 Fibo, scope for gains to the 1.1081 Fibo

• 1.0960 Fibo is a 61.8% retrace of the 1.1276-1.0448 (July-October) EBS fall

• 1.1081 Fibo is a 76.4% of the same 1.1276-1.0448 drop

• 14-day momentum remains positive, another sign spot will continue to climb

• Only a break, close under the tenkan line, now at 1.0921, would defer

• EUR/USD Trader TGM2334. Previous update nL1N3CT0GN

• Forward looking options were already flagging USD/JPY downside risk

• Risk reversals were near recent highs for downside vs upside strikes

• That boosted FX option implied volatility when USD/JPY fell

• Benchmark 1-month expiry rallied toward recent highs in low 9's

• Buyers of downside strikes as low as 145.00 and within next week

• These options would benefit from more USD/JPY volatility and losses

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• The cross moves deeper into its daily Ichimoku cloud

• Our 0.8718 long stop now close, 0.8645

• A low of 0.8650 and price leaning on the 30-day lower Bolli, 0.8648

• The 100DMA tight below at 0.8639 and then a 50% Fibo at 0.8629

• Daily RSI is at 38 and fourteen day momentum increasingly negative

• Weeklies set for sub-200WMA close and monthlies capped by Ichimoku cloud

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• Our short stop tripped at 1.2725 with 1.2733 the Wed high so far

• Both daily RSI and fourteen day momentum now looking stretched

• The early session high and modest pullback leaving a shadow

• The Dec. 21 1.2313-17 cloud twist still a risk to long plays

• Topside and upper hourly-daily Bolli bands just above the high at 1.2745

• We see pullback risk but will wait for stronger signals

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Synopsis:

Goldman Sachs presents its FX outlook for 2024, projecting further upside for the USD. The forecast is based on expectations of strong US growth and high yields, which are anticipated to sustain the Dollar's high valuation and limit the reversal of capital flows that have supported the USD over the past decade.

Key Points:

• US Growth Forecasts Above Consensus: Goldman Sachs' economists predict that US growth will outperform consensus estimates, contributing to the Dollar's strength.
• High Yield Environment: Higher yields in the US are expected to set a high benchmark for total return prospects, supporting the USD's strength.
• Impact on Capital Flows: The combination of strong US growth and higher yields is likely to limit, if not entirely prevent, the reversal of capital flows that have historically supported the Dollar's high valuation.
• Risks Leaning Toward a Stronger USD: There are risks that other economies might not be able to handle the level of monetary restriction required by the US, which could result in an even stronger and more prolonged Dollar strength.
• Emerging Market Currencies and Valuations: While emerging market currencies have appreciated against the G10, their valuations are now more challenging on a trade-weighted basis. The potential for outsized returns from these currencies depends critically on the behavior of the Dollar.
• Outlook on Dollar's Strength: The overall view is that the Dollar's strength will not erode quickly or easily, suggesting continued resilience and dominance in the FX market.

Conclusion:

Goldman Sachs' 2024 FX outlook anticipates continued upside for the USD, underpinned by above-consensus US growth forecasts and a high-yield environment. The firm expects these factors to sustain the Dollar's high valuation and limit the reversal of supportive capital flows. While there are risks, they mostly lean towards an even stronger USD, particularly if other economies struggle with monetary restrictions. The outlook suggests a challenging environment for emerging market currencies and indicates that the USD's strength is likely to persist.

• +0.2% in a busy 1.2705-1.2733 range on D3, with the U.S. dollar off 0.2%

• No tier 1 UK data, but U.S. GDP could be significant for the US dollar

• Charts; 5, 10, and 21-day moving averages climb with daily momentum studies

• 21-day Bollinger bands rise - the positive trending setup remains in play

• 1.2721. 61.8% of the July-October fall is under pressure but resilient

• Close below 1.2560 10-day moving average would undermine the topside bias

• 1.2694 NY close and 1.2745 August 30 top are initial support and resistance

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• AUD/USD opened +0.62% at 0.6647 after USD fell on dovish Fed comments nL1N3CT1WW

• It eased to 0.6637 after Aus Oct CPI came in softer than expected nAZN1FDF1K

• Dip was short lived and AUD/USD jumped to 0.6676 after 1.0% surge in NZD/USD

• NZD/USD soared above 0.6200 when RBNZ surprised with a hawkish hold nL4N3CU0NXnL1N3CU034

• AUD/NZD selling helped to cap and AUD/USD settled at 0.6655/60

• AUD/USD trending higher as key factors encourage AUD/USD bulls nL4N3CT4U5

• The next resistance is at the 76.4 of the July/Oct fall at 0.6747

• AUD/USD trending higher with the 5, 10 & 21-day MAs in a bullish alignment

• Support is at the 10-day MA at 0.6569 and break would ease upward pressure

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• AUD/USD briefly fell below 0.6640 from 0.6650 after Aus Oct CPI nAZN1FDF1K

• Softer inflation reading will comfort data dependent RBA

• Market was pricing in over a 50% chance of a RBA 25 BP hike in March

• AUD/USD quickly recovered to around 0.6645/50 after initial reaction

• AUD/USD support is @ 10-day MA @ 0.6569 and break would ease upward pressure

• Resistance is at the 61.8 of July/Oct fall at 0.6656

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• +0.15% after closing up 0.55%, with the USD -0.4% and broadly weaker

• The dovish Fed stance contrasted with the resolute Bank of England comments

• A strong Cyber weekend in the UK, but will this replace Christmas spending?

• Charts; 5, 10, and 21-day moving averages climb with daily momentum studies

• 21-day Bollinger bands rise - the positive trending setup remains in play

• 1.2721. 61.8% of the July-October fall is in view and likely resilient

• Close below 1.2523 10-day moving average would undermine the topside bias

• London's 1.2607 low and NY 1.2715 high are initial support and resistance

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• EUR/USD opens +0.36% after Fed comments sent US short-term yields tumbling nL1N3CT2HLnL1N3CT29W

• Fed's Waller (hawk) comments ignited speculation of an earlier Fed pivot nL1N3CT1ON

• EUR/USD broke stubborn resistance @ 1.0965 to 1.1009 - highest since Aug 12

• The next decent resistance is the 76.4 of July/Oct fall at 1.1080

• EUR/USD trending higher with the 5, 10 & 21-day MAs in a bullish alignment

• Support is at the 10-day MA at 1.0928 and break would ease upward pressure

• EUR/USD may consolidate ahead of key US data including US PCE on Thursday

• EUR/USD bulls hoping a soft US PCE price index will validate dovish Fed view

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Synopsis:

JP Morgan presents its outlook for major central bank policy trajectories in 2024, anticipating a shift from rate hikes to synchronized cuts across numerous central banks. This change is set against a complex macroeconomic backdrop and is expected to introduce new dynamics in the FX market.

Key Points:

• Challenging Macroeconomic Backdrop: The macro outlook for 2024 remains uncertain, with views varying from a soft-landing and additional Fed hikes to a potential recession. Navigating these scenarios will be crucial for FX market participants.
• Shift from Hikes to Cuts: A significant number of central banks are expected to start cutting policy rates in 2024, although rates will remain relatively elevated by the end of the year.
• Impact on Trading Themes: The commencement of rate-cutting cycles, especially by high-yield central banks, is predicted to create a variety of new trading themes, moving away from those that dominated in 2023.
• Carry Trade Dynamics: As yields on carry baskets decrease to below-average levels by mid-2024, carry trade will become less attractive and a narrower theme as the year progresses.
• Implications for Different Currencies:
  • The pressure on currencies from highly leveraged economies is expected to reduce.
  • Lower-yielding, high beta currencies that are currently undervalued may see less strain.
  • The FX market will likely be more responsive to factors other than yield, such as growth or value.
• New Opportunities: The shift in yield dynamics will provide opportunities to underweight certain high beta currencies against the USD as they move from high-yielders to low-yielders.
• Relative Value Opportunities: The relative sequencing of rate cuts will create opportunities for relative value (RV) trades, similar to the dynamics observed during rate hikes in 2023.

Conclusion:

JP Morgan's 2024 outlook for major central bank policies foresees a transition from rate hikes to synchronized cuts, impacting various aspects of the FX market. This shift is expected to introduce new trading themes, alter the dynamics of carry trades, and affect different currencies in distinct ways. The FX market is anticipated to be influenced more by factors like economic growth or value, rather than just yield considerations, offering a range of new trading and investment opportunities.

• AUD/USD opens +0.62% after USD fell on dovish comments from Fed hawk Waller nL1N3CT1ON

• US 2-year yield plunged 12 BPs and market pricing in Fed cut as early as May

• This contrasts with market pricing in possible RBA hike in early 2024

• AUD/USD traded above 61.8 of July/Oct fall at 0.6656 but closed just below

• A close above 0.6660 targets the July 14 high at 0.6895

• AUD/USD trending higher with the 5, 10 & 21-day MAs in a bullish alignment

• Support is at the 10-day MA at 0.6568 and break would ease upward pressure

• Key event today will be Aus Oct CPI - important for data dependent RBA

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• USD/JPY threatens a monthly reversal sell signal after multi-yr double-top

• Tues's 147.325 low is by daily cloud base and Oct's low at 147.30

• A close below them would put longs since mid-Sep at risk

• Also the 100-DMA and up TL from March at 146.90/27 last

• The 38.2% and 50% Fibos of July-Nov rise then eyed at 146.31/4.58

• The 144.58 level is also the weekly kijun

• Weekly cloud top and 50% of 2023's rise at 139.57 are M-T targets

• Close above daily kijun at 149.54 is needed to weaken downtrend

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• USD/JPY probing cloud base, Oct lows at 147.30 on Fed comments

• Fed's Goolsbee and Waller lay out possible case for rate cuts in H1 24

• A close Thur below 147.30 would be a monthly on-close sell signal

• Would reinforce the 2023-22 multi-decade highs and double-top reversal

• Thursday's key US data before that deadline now crucial for spec longs

• IMM spec long was biggest since 2017 in November, now under duress

• The 100-DMA next nearby prop, last at 146.90, and closer to 147 on Wed

• Daily range below the 100-DMA would target props by 146.31, then 144.58

• Reversal of Fed-BoJ policy divergence undermines 2023's 127.215-51.92 rise

• The 50% Fibo of 2023's rise and weekly cloud top are at 139.57

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