FX Update: Max complacency ahead of FOMC

A very long speech today from the RBA Governor Lowe, who discusses the challenges faced by central banks, given the current backdrop. Fairly clear from this and previous comments that Lowe will not be in favour of negative rates in Australia and that he emphasizes “maximisation of welfare” and the labour market more than inflation, which points to less reactivity to CPI releases like the one coming up tonight for Q3, perhaps, relative to employment-related releases. Prominent in the speech is that the central bank can do little to “improve the investment climate” as rates scrape to their effective lower bond and that policy stimulus has to come from elsewhere – namely the government and business, with investment projects that offer long term payoffs.

The G-10 rundown

USD – The US dollar is weak against the riskiest currencies, with the next test whether the Powell Fed continues to deliver liquidity in the size needed and whether the market is over-complacent on that front, not to mention how the market absorbs bad US economic data we see as likely on the way.

EUR – uninspiring price action for the Euro – need to see a positive catalyst for Europe as much as negative catalysts for the US dollar to excite bullish interesting above the 1.1200-1.1400 structural pivot zone.

JPY – the yen getting the worst of it as higher long yields correlated with JPY weakness and strong EM with strong yen carry trade interest.

GBP – Pity poor Boris, as his latest attempt to call an election has failed, with the opposition knowing that his mandate will very likely increase. Johnson will try other tactics to get the December election on track, as the LibDems are happy to cooperate, given where they are polling. But with the current full-bore melt-up in risk appetite and the fact that No Deal is effectively off the table, why hasn’t sterling firmed further?

CHF – with the backdrop about as supportive as it has ever been, EURCHF should be higher still, but it isn’t, so we’re cautious.

AUD – AUD finally catching a bit more of the positive risk contagion and perhaps firmness in CNY and hopes for the US-China trade deal. But for AUDUSD to continue higher through the key zone through 0.7000, we’ll need to see plenty more of the same backdrop here. Australia Q3 CPI up tonight!

CAD – The Bank of Canada seen as standing tall with the highest policy rate among developed economies after the FOMC rate chop tomorrow. An extension of the current environment could drive a considerable further sell-off in USDCAD if 1.3000 is taken, but a US recession scenario means a Canadian recession scenario and Canada has far more to worry about in private leverage terms.

NZD – AUDNZD tempting higher, but yield spreads will have a hard time supporting anything dramatic, meaning we may need a specific negative catalyst for NZD to drive a revaluation toward 1.10-1.1300.

SEK – the recent EURSEK sell-off did enough damage to the prior rally to maintain technical downside interest as long as the pair trades south of 10.80-85, but with such a supportive backdrop, its disappointing that we haven’t already followed through lower.

NOK – the krone posting new lows, but the disconnect with market conditions getting painfull stretched. Tempted to see a divergent momentum setup here in EURNOK on a weak close.

Upcoming Economic Calendar Highlights (all times GMT)

• 0930 – UK Sep. Net Consumer Credit
• 0930 – UK Sep. Mortgage Approvals
• 1300 – US Sep. S&P CoreLogic Home Price Index
• 1400 – US Oct. Consumer Confidence