In our FX review this week, we run through the Evergrande story that evolved into a risk-off move in FX markets during the first half of the week. The rest of the week focused around central bank meetings from both the US and the UK. Ultimately, both meetings provided little new information that materially shifted expectations.
Risk-off with China
The situation regarding the Chinese property develop Evergrande gathered traction early in the week. The second largest property company in the country has so far not paid the latest interest payments due on outstanding debt.
The concern here for FX market focusing on the bigger issue. A default by Evergrande is unlikely to be an issue in itself outside of China. But the message this sends is that there are cracks appearing in the economy. Add into the mix existing concerns about the economy slowing down, and it starts to snowball.
In our last FX review, we already flagged how lower commodity demand by China was hurting iron ore prices and dragging AUD lower. This week, although AUD held ground, the move was reflected by investors buying USD as a safe haven currency.
Central bank meetings
The USD buying meant that the market went into the latest US Fed meeting on Wednesday with a long bias. Key supports looked in danger of being broken on GBPUSD heading into the meeting. The 1.3600 handle had been tested twice over the summer and had held, so we were keen to see whether this could post a triple bottom again, with the spot rate hovering above it on Wednesday.
Ultimately, the Fed meeting provided little new information for participants to take positions on. It looks apparent that tapering of assets will begin at some point in Q4, and the dot plots indicate rate hikes are coming over 2022-2023.
The following day, the Bank of England met, with slightly more of a reaction seen. GBP crosses gained in the aftermath, with the committee signaling that modest policy tightening was likely. They also commented that tapering off asset purchases needn’t have to be completed before the rate hiking process starts.
As a result, GBPUSD does appear to have formed a triple bottom, bouncing up from the 1.3600 level on close on Friday.
Trade ideas from here
The moves this week provide us with limited moves given a lack of follow-through from the central bank meetings. Our highest conviction view would be viewing GBPUSD has having formed a triple bottom, with the bias to buy GBP for a move back towards the higher end of the recent range.
We also note USDJPY pushing into the mid 110’s, and see an option here to short the pair if you believe the Fed on Wednesday was actually dovish. Getting long JPY also acts as a hedge against further risk-off movements.