L/T Forecasts – The October Update and a Fragile GBP/USD Floor

EUR/USD – Hit a fresh range and multi-year low of 0.9536 on Sep 28. A decent rebound since, as markets are pricing the possibility of another 75BPs hike interest rates later this month and the terminal rate call is being lifted in some quarters to around 3% by end-Q1 2023 from current 1.25%. However, the EUR has not traded back above parity since Sep 20. The outlook will remain heavily dependent on developments in the war in Ukraine and the energy crisis. Investment flows are more negative as the EZ's trade surplus has turned to deficit. Despite the concerning red headlines still there is speculation the war could be at an end around year-end. We shall see. That would help, but for now we have to deal with reality. We see no reason to change forecasts this month. However, our arguably semi-bullish med-term estimates might need to be revised lower if there is a clear break below 0.9500 before the start of 2023.

USD/YEN – Previous post-FOMC/BOJ high of 145.90 from Sep 22 and perhaps more significantly the pre-intervention peak has been blown away to a new 14.57 peak. Despite continued intermittent warnings from the Japan admin that the govt remains ready to take necessary responses on excessive FX moves; one-sided moves aren't desirable and Sep's intervention had some impact against specs yield differentials continues to drive this market higher as the US 10-year yield continues to toy with a sustained 4.00%-plus break. There will be plenty of continued speculation surrounding the YEN and the MOF/BOJ and there's still money left in the coffers after spending around Usd 20bln last time. It does not look like 15.00 is a line in the sand, but 150.00 could well be. We suspect the MOF understand they cannot exactly defeat the market whilst the BOJ continues with YCC, but they can slow a charge on the huge psych mark. We suspect the MOF/BOJ could well act at least once more before 2022 is out, but there look few reasons to be long of the once haven. Yes, there are concerns over a US soft landing, but economically/growth wise elevated energy prices continue to weigh on Japan's terms of trade and the C/A, while the recent Q3 Tankan disappointed, with lg mfg coming in at 8 vs the 10 consensus and 9 last.

GBP/USD – Volatility like no other. So much for the more aggressive 50BPs BOE hike on Sep 22, Cable collapsed near -9.0% in just a couple of sessions to historic lows of 1.0350 on the 26th. The far bigger news was the hugely derided package of proposed and unfunded tax cuts that would not have only put a huge further strain on public finances and led to criticism from the likes of the IMF and rating agencies, but also the govt in the polls. Labour has soared to a huge lead in the polls, as those tax cuts were seen benefitting the rich. Since, there has been a part U-turn by the ridiculed Chancellor and the BOE has stepped in to buy a huge amount of gilt purchases (Gbp 13bn-plus) and some stability has returned to GBP. Further, investors are tipping between 50 and 100-plus BPs of hikes from the BOE on Nov 3. However, we remain concerned and have to act. We might well have seen the floor, for now,( though a number of firms do not rule out a serious parity test), but we cannot see big 1.1500 and 1.1735-50-plus returns in this backdrop. Market attitudes towards the UK govt will not improve any time soon, rightly, and under the fiscal microscope there are every real fears of a cliff edge scenario in the gilts market near-term. A quick sub-1.1000 return looks inevitable.

EUR/GBP – Yield differentials and the BOE's terminal rate could end up around 200BPs higher than that of the ECB. Playing an 0.8500-0.9000 range for much of the 2000s so far has served us pretty well. However, we are preparing for a fair break ahead and despite that UK yield advantage and the war in Europe still viewed as the bigger EURO negative we think a topside break is on the cards. Outlooks are similar to an extent given the energy crisis and coming recessions (already there?) for EUR and GBP, but Brexit and this UK fiscal crisis will be the bigger drivers ahead and Pound weights. How to fund that UK C/A deficit and set to stay as one of the widest in G10? The picture is likely to deteriorate further no matter what this UK govt come up with. Kwarteng will set out his debt-cutting plan in more detail Oct 31, having bowed to pressure to bring the date forward from Nov 23 given the economic turmoil (Sky News). Good luck!

USD/CHF – The Franc is a semi-surprise underperformer so far in Q4. This follows Sep's expected 75BPs SNB hike to 0.5% and bringing the rate into positive territory for the first time since 2015. However, smaller steps are seen ahead and CB president Jordan has warned the SNB will intervene in FX if CHF is too weak or too strong; base scenario is Switzerland will avoid a recession next year and Swiss inflation may rise a bit more before falling. We suspect USD/CHF around parity could be a theme for the market's chief present havens. However, we expect the Franc to stay strong, particularly vs its European partners and even more so over the next three months or so. Switzerland remains relatively insulated from Europe's energy crisis in Europe, while DEUTSCHE BANK recognise the CHF still stands as a (cheap) hedge vs global geopolitical and stagflationary risks.

USD/CAD – Clearly, we have been on the wrong side of history in Funds in 2022, particularly in H2. So much for the Loonie prop of an equally hawkish BOC. Even our expectations for relative CAD strength on many of the crosses on yield differentials has not borne fruit. The oil drop from Usd 125/brl-plus levels in mid-Jun to sub-Usd 100 ever since the start of Sep amid reduced demand out of Asia has proved an independent negative. The Loonie is clearly being hit with the commodity bloc group stick and no matter that Canada fundamentals still look more than okay, ie tight monetary policy, relatively tight fiscal policy, a C/A surplus, high investment attractiveness and a net creditor. We've been burned too many times before. We'll stay cautious this time on CAD bullishness except to say when the Dollar peaks the Loonie could reap the rewards faster than most of its G10 counterparts. That's for another six months or so though!