Sweden

Highlights On a tactical horizon, underweight bonds versus cash, especially those bonds with deeply negative yields… …and underweight bonds versus equities. On a strategic horizon, remain overweight a 50:50 combination of U.S. T-bonds and Italian BTPs versus a 50:50 combination of German Bunds and Spanish Bonos, at either 10-year or 30-year bond maturities. Investors could also play the component pairs: overweight U.S. T-bonds versus German bunds; and overweight Italian BTPs versus Spanish Bonos. New recommendation: switch Japanese yen long exposure into Swedish krona long exposure. Fractal trade: long SEK/JPY. Feature Chart of the WeekSwiss Bond Yields Have Found It Difficult To Go Down, But Easy To Go Up! Swiss Bond Yields Have Found It Difficult To Go Down, But Easy To Go Up! Swiss Bond Yields Have Found It Difficult To Go Down, But Easy To Go Up! Anybody who has dared to bet that JGB yields would rise has ended up being carried out of their job, feet first. Shorting Japanese government bonds (JGBs) is known as the widow maker trade. Over the past 20 years, any investment manager who has dared to bet that JGB yields would rise – whether starting from 2 percent, 1 percent, or even 0.5 percent – has ended up being carried out of their job in a box, feet first. Today, the Bank of Japan’s policy of ‘yield curve control’ means that JGB yields are constrained within a tight range around zero, limiting their immediate scope to break higher. The European equivalent of the widow maker trade has been to short Swiss government bonds. Just as with JGB’s during the past two decades, anybody who has dared to bet that Swiss government bond yields would rise – whether starting from 2 percent, 1 percent, or 0.5 percent – has been proved fatally wrong (Chart I-2). Chart I-2Widow Makers: Shorting Japanese And Swiss Bonds Widow Makers: Shorting Japanese And Swiss Bonds Widow Makers: Shorting Japanese And Swiss Bonds That is, until this year, when Swiss government bond yields reached -1 percent. The Lower Bound To Bond Yields Is Around -1 Percent According to several senior central bankers who have spoken to us, the practical lower bound to the policy interest rate is -1 percent, because “-1 percent counterbalances the storage cost of holding physical cash and/or other stores of value”. They argue that if bank deposit rates were to fall much below -1 percent, it would be logical for bank depositors to flee wholesale into physical cash, and such a deposit flight would destroy the banking system.1 Still, couldn’t central banks just abolish physical cash, forcing us all into ‘digital cash’ with unlimited negative interest rates? No, because that would just push us into other stores of value: for example, gold, or the rapidly growing ‘decentralised’ cryptocurrency asset-class. The common counterargument is that cryptocurrencies’ volatility makes them a poor store of value. But that is also true for gold: during a few months in 2013, gold lost one third of its value (Chart I-3). Yet who has ever argued that gold cannot be a store of value just because its price is volatile! Chart I-3Gold Is A Store Of Value ##br## Despite Its Volatility Gold Is A Store Of Value Despite Its Volatility Gold Is A Store Of Value Despite Its Volatility The practical lower bound to the policy interest rate is around -1 percent because the central bank policy rate establishes the banking system’s funding rate – for example, the Eonia rate in the euro area (Chart I-4). If the funding rate fell well below the rate that the banks were paying on deposits, the banking system would come under severe strain and ultimately go bust. The lower bound of the policy rate also sets the lower bound of the bond yield, because a bond yield is just the expected average policy rate over the bond’s lifetime. Chart I-4The Policy Interest Rate Establishes The Banking System's Funding Rate The Policy Interest Rate Establishes The Banking System's Funding Rate The Policy Interest Rate Establishes The Banking System's Funding Rate There is one important exception. If bond investors price in the possibility of being repaid in a different and more valuable currency, the bond yield will carry a further redenomination discount as an offset for the potential currency gain. This is relevant to euro area bonds because there remains the remote possibility of euro disintegration. Bonds which would expect to see a currency redenomination gain – notably, German bunds – therefore carry an additional discount on their yields. But for bonds where no currency redenomination is possible, the practical lower bound to bond yields is around -1 percent. Overweight High Yielding Bonds Versus Low Yielding Bonds To state the obvious, the closer that a bond yield gets to the -1 percent lower bound, the more limited becomes the possibility for a further yield decline (capital gain), while the possibility for a yield increase (capital loss) stays unlimited. This unattractive lack of upside combined with plenty of potential downside is called negative skew or negative asymmetry. It follows that, close to the lower bound of yields, the cyclicality or ‘beta’ of bond prices also becomes asymmetric. In risk-off phases, the bond prices cannot rally; while in risk-on phases, bond prices can plummet. Making such bonds a ‘lose-lose’ proposition. Case in point: Swiss bond yields have found it difficult to go down this year, but very easy to go up (Chart of the Week). Because their yields were already so close to -1 percent, Swiss bond yields could not decline much during the bond market’s recent strong rally – meaning, Swiss bond prices were very low beta on the way up. But in the recent reversal, Swiss bond yields have risen much more than others – meaning, Swiss bond prices are high beta on the way down (Chart I-5).   Chart I-5Swiss Bond Prices Are Low Beta Going Up, But High Beta Going Down Swiss Bond Prices Are Low Beta Going Up, But High Beta Going Down Swiss Bond Prices Are Low Beta Going Up, But High Beta Going Down Does this mean the widow maker trade can finally work? Yes, but only on a tactical horizon. For the full rationale, which we will not repeat here, please see Growth To Rebound In The Fourth Quarter, But Fade In 2020. However in summary, expect bond yields to edge modestly higher, and especially those yields that are deeply in negative territory. Also on a tactical horizon, prefer equities over bonds.  On a longer term horizon, a much safer way to play the asymmetric beta is to short low yielding bonds in relative terms. In other words, overweight high yielding bonds versus low yielding bonds.2 Close to the lower bound of yields, the cyclicality or ‘beta’ of bond prices becomes asymmetric. Our strategic recommendation is to overweight a 50:50 combination of U.S. T-bonds and Italian BTPs versus a 50:50 combination of German Bunds and Spanish Bonos, at either 10-year or 30-year bond maturities. Since initiation five months ago, the recommendation at the 30-year maturity is already up by almost 7 percent. Nevertheless, it has a lot further to go (Chart I-6). Investors could also play the component pairs: overweight U.S. T-bonds versus German bunds; and overweight Italian BTPs versus Spanish Bonos (Chart I-7 and Chart I-8), but the combined two bonds versus two bonds recommendation has better return to risk characteristics. Chart I-6Expect High Yielding Bonds To Outperform Low Yielding Bonds Expect High Yielding Bonds To Outperform Low Yielding Bonds Expect High Yielding Bonds To Outperform Low Yielding Bonds Chart I-7Expect Yield Spread Convergence At 10-Year Maturities... Expect Yield Spread COnvergence At 10-Year Maturities... Expect Yield Spread COnvergence At 10-Year Maturities... Chart I-8...And At 30-Year ##br##Maturities ...And At 30-Year Maturities ...And At 30-Year Maturities Switch Into The Swedish Krona   Bond yield spreads are also an important driver of currency moves. The currency corollary of overweighting high yielding versus low yielding bonds is to tilt towards low yielding currencies, because these are the currencies that have the most scope for substantial upside. Our favourite low yielding currency has been the Japanese yen, and this has worked very well. Since early 2018, the yen has been the strongest major currency, and is up 16 percent versus the euro. But our favourite currency is now changing to the Swedish krona, for three reasons: The SEK is depressed from a valuation perspective. For example, it is the only major currencies that is weaker than the GBP compared to before the Brexit vote in 2016 (Chart I-9). Chart I-9The Swedish Krona Has Underperformed The Pound Despite Brexit The Swedish Krona Has Underperformed The Pound Despite Brexit The Swedish Krona Has Underperformed The Pound Despite Brexit Unlike other major central banks, the Riksbank is seeking to normalise the policy rate upwards. The SEK is technically oversold on its 130-day fractal dimension, signalling over-pessimism in the price (Chart I-10), while the JPY is showing the opposite tendency. Chart I-10The Swedish Krona Is Due A Countertrend Move The Swedish Krona Is Due A Countertrend Move The Swedish Krona Is Due A Countertrend Move Bottom Line: switch Japanese yen long exposure into Swedish krona long exposure. Fractal Trading System* (Chart 1-11) As just discussed, this week's recommended trade is long SEK/JPY. Set the profit target at 1.5 percent with a symmetrical stop-loss. In other trades, long NZD/JPY has started off very well and long Spain versus Belgium achieved its 3.5 percent profit target, at which it was closed, leaving five open positions. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. Chart I-11 NZD VS. JPY NZD VS. JPY The post-June 9, 2016 fractal trading model rules are: When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions. For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com.   Dhaval Joshi Chief European  Investment Strategist dhaval@bcaresearch.com Footnotes 1 The cost of holding physical cash is the cost of its safe storage. 2 Please see the European Investment Strategy Weekly Report ‘Growth To Rebound In The Fourth Quarter, But Fade In 2020’, October 3, 2019 available at eis.bcaresearch.com. Fractal Trading Model Cyclical Recommendations Structural Recommendations Fractal Trades The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? The ‘Widow Maker’ Trade: Can It Finally Work? Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields   Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations  

Highlights The currency market is bifurcated in terms of shorter-term expectations versus longer-term factors. The Swedish krona, Norwegian krone, and British pound are solid long-term buys, but could remain very volatile in the short term. We continue to focus on the crosses rather than outright dollar bets. Remain long SEK/NZD, GBP/JPY, and NOK/SEK. Tighten stops on long GBP/JPY to protect profits. EUR/SEK should top out once global growth improves. Sell the gold/silver ratio at 90, as recommended in last week’s report.1 Feature Chart I-1One Way Street Since 2018 One Way Street Since 2018 One Way Street Since 2018 Of all the G10 currencies we follow, the Swedish krona is probably the one that is the most perplexing. The Riksbank is one of the few central banks to have raised rates this year, but the krona remains the weakest G10 currency. Admittedly, the performance of the Swedish manufacturing sector has been dismal, and was especially so in September, but this has not been a story specific to Sweden alone. The euro area, which is also experiencing a deep manufacturing recession, has seen better currency performance despite a more dovish European Central Bank (ECB). The underperformance of the krona begs the question of whether it signals a much prolonged global manufacturing recession, or is indicative of something more endogenous to Sweden. Put another way, has the driver of USD/SEK (and even USD/NOK) strength been an appreciating dollar, or more domestic factors (Chart I-1)? And if it is the latter, what are the important signposts to look out for should a turnaround be around the corner? The Soft Versus Hard Data Debate The big question for Sweden is whether the manufacturing sector is just in a volatile bottoming process, or about to contract much further. Industrial production is currently growing at 4% year-over-year, but the signal from the soft data is that it should be contracting in the double digits (Chart I-2, top panel). As such there is either a big disconnect between the perception of investors and reality, or we are on the verge of a much deeper manufacturing slump. Exchange rates tend to be extremely fluid in discounting a wide swath of economic data, and in the case of Sweden, in discounting the outcome for global growth. However, with EUR/SEK at 10.8 and USD/SEK at 9.7 – the latter well above its 2008 highs – it is fair to assume that anything other than a deep recession will justify a stronger SEK.  One of the more consistent ratios in calling a bottom in the Swedish manufacturing sector in particular (and that of the Eurozone in general) is the manufacturing new orders-to-inventories ratio (Chart I-2, bottom panel). The tick down in September was disconcerting. However, unlike the manufacturing PMI, this ratio is not hitting new lows, tentative evidence that we might be in a volatile bottoming process rather than a protracted slump. The last time we encountered such a divergence was in 2011/2012, at the height of the European debt crisis; in that instance, Swedish hard data ended up sending the right signal for the overall economy. The deterioration in the manufacturing sector has yet to hit domestic consumption in general or the labor market in particular.  The deterioration in the manufacturing sector has yet to hit domestic consumption in general or the labor market in particular. The import component of the PMI index remains well above that of exports. Meanwhile, the employment component of the PMI index began to stabilize around the middle of this year, meaning employment growth should bottom at around 1% or so (Chart I-3). Swedish exports are higher up the manufacturing food chain than in most other developed economies, and autos are quite important. But so far, the Swedish economy has weathered the auto slowdown quite well, with production still clocking in at 7% per year. Chart I-2Soft Data Is Much Worse Soft Data Is Much Worse Soft Data Is Much Worse Chart I-3Domestic Demand Is Holding Up Well Domestic Demand Is Holding Up Well Domestic Demand Is Holding Up Well The tick up in the Swedish unemployment rate is problematic, but we do not believe it constitutes a major change in labor market dynamics. Sweden has a long history of higher openness toward asylum seekers and refugees than many other European countries. The Syrian crisis a couple of years ago led to an exceptional surge, where the number of asylum seekers skyrocketed to over 150,000 or almost 1.5% of the total population (Chart I-4). Historically, immigration has provided a big labor dividend to Sweden, allowing growth to outpace both the U.S. and the euro area. But this has also been a source of frictional unemployment, as new migrants integrate into the labor force. Chart I-4A New Pool Of Labor That Has To Be Integrated A New Pool Of Labor That Has To Be Integrated A New Pool Of Labor That Has To Be Integrated Foreign-born workers now constitute about 20% of the total population, a big portion of which need to learn a new language and adopt new skills (Chart I-5A). This growth dividend will be reaped for many years to come. Integration is a politically contentious issue, and so the highly restrictive asylum and reunification law adopted in mid-2016 probably means the immigration boom is behind us. The rise of the anti-immigration Sweden Democrats in the September 2018 elections is a case in point. However, the pivot of the democratic population towards the right has been a global phenomenon, and so is not as negative for Sweden on a relative basis. All that to say, compared to most developed nations, Sweden still enjoys a relatively positive demographic outlook (Chart I-5B). Chart I-5AA Huge Labor Dividend A Huge Labor Dividend A Huge Labor Dividend Chart I-5BNo Apparent Demographic Cliff No Apparent Demographic Cliff No Apparent Demographic Cliff The inflow of migrants has a mixed impact on inflation. While there is downward pressure on wages, due to an increase in the share of employment that pays lower wages, there is still upward pressure on housing and consumption in response to the increased number of workers. This comes on top of a fiscal boost as the government spends more on social services. Meanwhile, the unemployment rate among foreign-born people is around 15%. This means that the Phillips curve is flat for the first few years, before it starts to steepen. But as the new labor force is finally absorbed into the economy, it should start to generate meaningful wage pressures. The Riksbank clearly understands these dynamics, which is why over the prior years, its stance has been dovish even when the Swedish economy has been holding up well. Interest rates were cut to negative territory in 2015 and held at -0.5% (lower than the ECB policy rate) all through the global recovery in 2016 and 2017. Quantitative easing has also been extended up until 2020, well ahead of the ECB’s renewed asset purchase program announcement. Both have tremendously eased monetary conditions in Sweden, including via a weaker currency. Going forward, there are a few key reasons to believe  the path of least resistance for the krona is now up: A weak krona has typically helped the manufacturing sector with a lag of twelve months.  A weak krona has typically helped the manufacturing sector with a lag of twelve months. Negative divergences only tend to happen ahead of deep recessions. Unless we are in that particular situation now, better demand for relatively cheaper Swedish goods (think Volvo versus BMW) should lead to a stronger krona (Chart I-6). Yes, the Riskbank has been conducting QE, but the pace of expansion in its balance sheet has been slowing in recent quarters. USD/SEK has tended to track relative balance sheet trends between the Riksbank and the Fed, but a gaping wedge has opened up in favor of the krona (Chart I-7). Meanwhile, with the Fed about to re-expand its balance sheet, this should also favor a stronger SEK versus the USD. Chart I-6Swedish Krona And Manufacturing Swedish Krona And Manufacturing Swedish Krona And Manufacturing Chart I-7USD/SEK And Relative Balance Sheets USD/SEK And Relative Balance Sheets USD/SEK And Relative Balance Sheets The Swedish housing market is becoming a thorn in the Riksbank’s side. When negative rates were introduced in 2015, growth in house prices exploded to the tune of 15% year-on-year (Chart I-8). More recently, a curb on migration has allowed a cooling of sorts, but Swedish household leverage remains very elevated. With the memory of the 1990s housing crisis still fresh in their minds, this is making the Riksbank quite uncomfortable with its current policy stance. The carry cost is lower from being short NZD compared to being short the U.S. dollar. Our bias is that though Governor Stefan Ingves prefers to renormalize policy as quickly as possible, given that he is managing a small-open economy with trade a whopping 45% of GDP, but is held hostage to external conditions. The SEK is the cheapest currency in the G10 universe, and could bounce sharply on even the softest evidence indicating global growth has bottomed. Furthermore, rising global growth will tighten resource utilization, which should begin to boost underlying inflationary pressures in Sweden (Chart I-9) Chart I-8House Prices In Sweden##br## Are Bubbly House Prices In Sweden Are Bubbly House Prices In Sweden Are Bubbly Chart I-9Resource Utilization And Inflation In Sweden Resource Utilization And Inflation In Sweden Resource Utilization And Inflation In Sweden In terms of SEK trading strategy, USD/SEK and NZD/SEK tend to be highly correlated; since the SEK has a higher beta to global growth than the kiwi (Sweden exports 45% of its GDP versus 27% for New Zealand). On a relative basis, the Swedish economy appears to have bottomed relative to that of the U.S., making the SEK/NZD an attractive way to play USD/SEK downside. Meanwhile, the carry cost is lower from being short NZD compared to being short the U.S. dollar (Chart I-10). As for EUR/SEK, the cross could consolidate at current levels before heading lower but will ultimately peak once global growth reaccelerates. Chart I-10Remain Long SEK/NZD Remain Long SEK/NZD Remain Long SEK/NZD Bottom Line: We remain long the SEK/NZD as a relative value play, but the true upside lies in the SEK/USD cross. Our bias is that SEK weakness has been driven by the market’s focus on disappointing soft data, while hard data remains relatively resilient. Once it becomes clearer that the global growth environment is not as precarious as the surveys suggest, the krona could bounce sharply. Housekeeping Our long GBP/JPY position hit 5% this week. We are tightening stops to 138 in order to protect profits. We were also stopped out of short EUR/NOK for a 2% loss. We are standing aside for now. EUR/NOK is now trading above 2008 recession levels, which is only justifiable by a prolonged growth recession, but risk management warrants patience for now. Stay tuned.   Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “On Money Velocity, EUR/USD And Silver,” dated October 11, 2019, available at fes.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 USD Technicals 1 USD Technicals 1 Chart II-2USD Technicals 2 USD Technicals 2 USD Technicals 2 Recent data in the U.S. have been soft: Retail sales contracted by 0.3% month-on-month in September. Industrial production fell by 0.4% month-on-month. Both export and import prices fell by 1.6% year-on-year in September. Michigan Consumer Sentiment Index grew to 96 in October, up from 93.2 in the previous month. NY Empire State Manufacturing Index increased to 4 in October, up from 2 in September. Building permits and housing starts both fell by 2.7% and 9.4% month-on-month in September, but the housing recovery remains intact. Initial jobless claims increased to 214K for the week ended Oct 11th. The DXY index depreciated by 0.7% this week. The latest Beige Book summarized that the U.S. economy expanded at a slight-to-modest pace. The slowdown in the manufacturing sector remains the biggest risk to the economy, while trade tensions continue to weigh on business sentiment and capex intensions. The most recent “entente” in trade discussions might represent a pivotal shift from heightened uncertainty that has prevailed throughout the summer. Report Links: On Money Velocity, EUR/USD And Silver - October 11, 2019 Preserving Capital During Riot Points - September 6, 2019 Has The Currency Landscape Shifted? - August 16, 2019 The Euro Chart II-3EUR Technicals 1 EUR Technicals 1 EUR Technicals 1 Chart II-4EUR Technicals 2 EUR Technicals 2 EUR Technicals 2 Recent data in the euro area remain subdued: Headline inflation fell to 0.8% year-on-year in September, the slowest in nearly three years. Core inflation however, increased to 1% year-on-year. Industrial production in the euro area continued to contract, by 2.8% year-on-year in August. The ZEW sentiment in the euro area fell further to -23.5 in October, however this is well above expectations of -33. The ZEW sentiment for Germany also fell to -22.8 in October. It is worth noting that expectations continue to improve relative to the current situation. The trade balance in the euro area improved to €20.3 billion in August, up from the downward-revised €17.5 billion in July. However, this is mostly due to a contraction in imports. EUR/USD rose by 0.9% this week, in part helped by broad dollar weakness. The trade dynamics in the euro area remain worrisome: exports fell by 2.2% year-on-year in August, while imports plunged by 4.1% year-on-year. Notably, year-to-date, the EU’s trade surplus with U.S. grew to €103 billion, up from €91 billion a year earlier, while the trade deficit with China widened further to €127 billion from €116 billion. Report Links: On Money Velocity, EUR/USD And Silver - October 11, 2019 A Few Trade Ideas - Sept. 27, 2019 Battle Of The Central Banks - June 21, 2019 Japanese Yen Chart II-5JPY Technicals 1 JPY Technicals 1 JPY Technicals 1 Chart II-6JPY Technicals 2 JPY Technicals 2 JPY Technicals 2 Recent data in Japan continue to disappoint: Industrial production fell by 4.7% year-on-year in August. Capacity utilization decreased by 2.9% month-on-month in August. The Japanese yen fell by 0.8% against the U.S. dollar this week. Kuroda has again emphasized that the BoJ will not hesitate to act if economic developments continue to deteriorate. On the other hand, while the Fed and the ECB are both on course to expand their balance sheets through asset purchases, it is an open question as to how much more the BoJ can do, beyond yield curve control. We remain long the yen in anticipation that it will require a “Lehman moment” for the BoJ to act aggressively. Report Links: A Few Trade Ideas - Sept. 27, 2019 Has The Currency Landscape Shifted? - August 16, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 British Pound Chart II-7GBP Technicals 1 GBP Technicals 1 GBP Technicals 1 Chart II-8GBP Technicals 2 GBP Technicals 2 GBP Technicals 2 Recent data in the U.K. have been mostly negative: The ILO unemployment rate slightly increased to 3.9% in August. Average earnings quarterly growth slowed to 3.8%, however this was above expectations of 3.7%. The Retail price index grew by 2.4% year-on-year in September, a slowdown from 2.6% in the previous month. Headline inflation was unchanged at 1.7% year-on-year in September, while core inflation jumped to 1.7% from 1.5%. Retail sales grew by 3.1% year-on-year in September, up from 2.6% in the previous month. GBP/USD surged by 3.3% this week on optimism towards the European Council Summit on Brexit. From a valuation perspective, the pound is trading at a large discount to its fair value. Should positive Brexit news continue to hit the headlines, the pound could continue to soar. We are long GBP/JPY, which is above 5% in the money. Tighten stop to 138. Report Links: A Few Trade Ideas - Sept. 27, 2019 United Kingdon: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Battle Of The Central Banks - June 21, 2019 Australian Dollar Chart II-9AUD Technicals 1 AUD Technicals 1 AUD Technicals 1 Chart II-10AUD Technicals 2 AUD Technicals 2 AUD Technicals 2 Recent data in Australia have been modest: NAB business confidence fell further to -2, while conditions improved to 1 in Q3. On the labor market front, the unemployment rate fell further to 5.2% in September. 14.7K jobs were created, consisting of 26.2K full-time jobs and a loss of 11.4K part-time jobs. AUD/USD increased by 0.4% this week. RBA minutes were released earlier this week. Interestingly, it presents a sharp debate about the effects of low rates. On the one hand, lower rates have been theoretically justified to achieve full employment and the inflation target. On the other hand, some RBA members fear that low rates could fuel already inflated house prices. The probability for another rate cut has thus decreased post RBA minutes. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 NZD Technicals 1 NZD Technicals 1 Chart II-12NZD Technicals 2 NZD Technicals 2 NZD Technicals 2 Recent data in New Zealand have been negative: Visitor arrivals increased by 1.8% year-on-year in August, slightly down from 2% in the previous month. Headline inflation slowed to 1.5% year-on-year in Q3. NZD/USD has been more or less flat this week. Closely tied to global growth, the New Zealand dollar has been fluctuating with the ebb and flow of the U.S.-China trade headlines. The two countries have agreed on a partial deal last week, however the details remain vague. While the kiwi is a high beta currency, it should unerperform at the crosses. We continue to play the kiwi weakness through the Aussie dollar and the Swedish Krona. Report Links: USD/CNY And Market Turbulence - August 9, 2019 Where To Next For The U.S. Dollar? - June 7, 2019 Not Out Of The Woods Yet - April 5, 2019 Canadian Dollar Chart II-13CAD Technicals 1 CAD Technicals 1 CAD Technicals 1 Chart II-14CAD Technicals 2 CAD Technicals 2 CAD Technicals 2 Recent data in Canada have been relatively strong: The unemployment rate decreased further to 5.5% in September. Moreover, average hourly wages continued to grow by 4.3% year-on-year, up from 3.8% in the previous month. Lastly, 53.7K jobs were created in September, well above expectations of 10K. Both headline and core inflation were unchanged at 1.9% year-on-year in September. The Canadian dollar has appreciated by 1% against the U.S. dollar, on the back of the positive employment data last Friday. All eyes are on the federal election this month, which could be crucial for the future of the Canadian energy sector and environment policies.  Report Links: Preserving Capital During Riot Points - September 6, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Swiss Franc Chart II-15CHF Technicals 1 CHF Technicals 1 CHF Technicals 1 Chart II-16CHF Technicals 2 CHF Technicals 2 CHF Technicals 2 Recent data in Switzerland have been positive: The trade surplus (excluding precious metals) widened sharply to CHF 2.88 billion in September. Notably, Swiss exports grew by 8.2% month-on-month to CHF 20.3 billion, led by higher sales of chemical and pharmaceutical products. Swiss imports slightly dropped by 1.4% month-on-month to CHF 17.4 billion. Producer and import prices continued to fall by 2% year-on-year in September. USD/CHF fell by 1% this week. The Swiss franc will continue to fight a tug-of-war between being a defensive currency, but a tool of manipulation by the SNB. Our guestimate is that EUR/CHF 1.06 is an ultimate stress point.  Global portfolios should hold the Swiss franc as insurance, for the simple reason that the currency is a structural outperformer. Report Links: Notes On The SNB - October 4, 2019 What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Norwegian Krone Chart II-17NOK Technicals 1 NOK Technicals 1 NOK Technicals 1 Chart II-18NOK Technicals 2 NOK Technicals 2 NOK Technicals 2 Recent data in Norway have been depressed: The trade balance shifted to a deficit of NOK 1.2 billion in September. That’s a decrease of NOK 24 billion year-on-year. The Norwegian krone has depreciated by nearly 1% against the U.S. dollar this week. Energy prices remain subdued over the past few weeks. Moreover, the Norwegian trade balance has shifted to a deficit for the first time since November 2017. Exports plunged by 19.5% year-on-year, due to lower sales of energy products, while imports jumped by 12.9% year-on-year. The message is clear – Norway continues to hold up well domestically, but dependence on petroleum exports is introducing volatility into any growth forecasts. BCA has lowered its oil price projections for 2019, which has dampened the appeal of the Norwegian Krone. Stay tuned. Report Links: A Few Trade Ideas - Sept. 27, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Swedish Krona Chart II-19SEK Technicals 1 SEK Technicals 1 SEK Technicals 1 Chart II-20SEK Technicals 2 SEK Technicals 2 SEK Technicals 2 Recent data in Sweden have been neutral: The unemployment rate was unchanged at 7.1% in September. USD/SEK fell by 1.1% this week. As the worst performing G-10 currency this year, the Swedish krona is now trading at a large discount to its fair value. Please refer to our front section this week which presents an in-depth analysis on the Swedish economy and the krona. Report Links: Where To Next For The U.S. Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 201 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights In this Weekly Report, we present our semi-annual chartbook of the BCA Central Bank Monitors. All of the Monitors are now below the zero line, indicating a growing need to ease global monetary policy (Chart of the Week). Central bankers have already gone down that path in several countries over the past few months (the U.S., the euro area, Australia and New Zealand), helping sustain the powerful 2019 rally in global bond markets. Feature With the global manufacturing & trade downturn now threatening to spill over into domestic demand in the major developed markets, policymakers will need to stay dovish to stave off recession. This will keep global bond yields at depressed levels in the near term, at least until widely-followed data like manufacturing PMIs stabilize and/or there is positive news on U.S.-China trade negotiations. Chart of the WeekStrong Pressures To Ease Global Monetary Policy Strong Pressures To Ease Global Monetary Policy Strong Pressures To Ease Global Monetary Policy Yields already discount a lot of bad economic news, however, and there is a ray of hope visible in the bottoming out of our global leading economic indicator. A sustainable bottom in global bond yields, though, will require some change in the current downward growth or inflation momentum highlighted in our Central Bank Monitors. Yields already discount a lot of bad economic news, however, and there is a ray of hope visible in the bottoming out of our global leading economic indicator. A sustainable bottom in global bond yields, though, will require some change in the current downward growth or inflation momentum highlighted in our Central Bank Monitors.  An Overview Of The BCA Central Bank Monitors* Chart 2Low Bond Yields Are Consistent With Our CB Monitors Low Bond Yields Are Consistent With Our CB Monitors Low Bond Yields Are Consistent With Our CB Monitors The BCA Central Bank Monitors are composite indicators designed to measure the cyclical growth and inflation pressures that can influence future monetary policy decisions. The economic data series used to construct the Monitors are not the same for every country, but the list of indicators generally measure the same things (i.e. manufacturing cycles, domestic demand strength, commodity prices, labor market conditions, exchange rates, etc). The data series are standardized and combined to form the Monitors. Readings above the zero line for each Monitor indicate pressures for central banks to raise interest rates, and vice versa. Through the nexus between growth, inflation, and market expectations of future interest rate changes, the Monitors do exhibit broad correlations to government bond yields in the Developed Markets (Chart 2). All of the Monitors are currently pointing in a bond-bullish direction, making them less useful as a country allocation tool within global bond portfolios. With easing pressures most intense in the euro area, given that the ECB Monitor has the lowest reading, our recommended overweight stance on core euro area government bonds (hedged into U.S. dollars) remains well supported. In each BCA Central Bank Monitor Chartbook, we include a new chart for each country that we have not shown previously. In this edition, we show the components of the Monitors, grouped into those focusing on economic growth and inflation, plotted against our central bank discounters that indicate the amount of rate cuts/hikes priced into global Overnight Index Swap (OIS) curves. Fed Monitor: Signaling A Need For More Cuts Our Fed Monitor has fallen below the zero line (Chart 3A), indicating that the Fed’s summer rate cuts were justified with more easing still required. The Monitor, however, has not yet fallen to levels seen during U.S. recessions and is more consistent with the below-trend growth periods in 2016 and the late-1990s. The views of the FOMC on U.S. monetary policy are more deeply divided now than has been seen in many years. The doves can point to slumping global growth, persistent trade uncertainty, contracting capital spending and falling inflation expectations as reasons to continue cutting rates. The hawks can look at continued labor market tightness, elevated asset prices and realized inflation rates holding near the Fed’s 2% inflation target (Chart 3B) as reasons to keep monetary policy steady. That mixed picture can be seen in the components of our Fed Monitor, with the growth components showing the biggest pressure for more rate cuts compared to more stable readings from the inflation and financial components (Chart 3C). Chart 3AU.S.: Fed Monitor U.S.: Fed Monitor U.S.: Fed Monitor Chart 3BU.S. Realized Inflation Holding Firm U.S. Realized Inflation Holding Firm U.S. Realized Inflation Holding Firm Chart 3CGreatest Pressure For Fed Rate Cuts From Growth Components Of Our Fed Monitor Greatest Pressure For Fed Rate Cuts From Growth Components Of Our Fed Monitor Greatest Pressure For Fed Rate Cuts From Growth Components Of Our Fed Monitor The U.S. Treasury market may have gotten ahead of itself after the latest decline in yields, which looks stretched versus the Fed Monitor. The U.S. Treasury market may have gotten ahead of itself after the latest decline in yields, which looks stretched versus the Fed Monitor (Chart 3D). We still expect the Fed to deliver just one more rate cut at the FOMC meeting at the end of October, as the “hard” U.S. data is outpeforming the “soft” data like the weak ISM surveys. That leaves Treasury yields vulnerable to some rebound if global growth stabilizes, although that is conditional on no new breakdown of the U.S.-China trade negotiations – a factor that continues to weigh on U.S. business confidence. Chart 3DTreasury Yields More Than Fully Discount Fed Easing Pressures Treasury Yields More Than Fully Discount Fed Easing Pressures Treasury Yields More Than Fully Discount Fed Easing Pressures BoE Monitor: Easier Policy Needed Our Bank of England (BoE) Monitor, which was in the “tighter money required” zone from 2016-18, has been below the zero line since April of this year (Chart 4A). The market agrees with the message from the Monitor and is now pricing in -12bps of rate cuts over the next twelve months. The relentless uncertainty surrounding Brexit has triggered sharp downgrades of growth expectations and weakened business confidence, which the BoE is now factoring into its own projections. In the August Inflation Report, the BoE lowered its 2020 inflation forecast to below 2% - no surprise given the sharp fall in realized inflation that has already occurred even as economic growth has still not yet fallen substantially below trend (Chart 4B). Chart 4AU.K.: BoE Monitor U.K.: BoE Monitor U.K.: BoE Monitor Chart 4BFalling U.K. Inflation Opens The Door To A BoE Ease Falling U.K. Inflation Opens The Door To A BoE Ease Falling U.K. Inflation Opens The Door To A BoE Ease Still, weakening growth components have been the main driver of the BoE Monitor into rate cut territory (Chart 4C). While a strong jobs market is helping support consumer spending, the Brexit turmoil is having a lasting impact on future growth. Since the 2016 Brexit referendum, business confidence and real business investment have collapsed which, in turn, has hurt productivity growth, as we discussed in a Special Report last month.1 Chart 4CBrexit Uncertainty + Slumping Growth = Pressure For BoE Rate Cuts Brexit Uncertainty + Slumping Growth = Pressure For BoE Rate Cuts Brexit Uncertainty + Slumping Growth = Pressure For BoE Rate Cuts The uncertainty around Brexit dominates the economic outlook and any future BoE decisions. Our Geopolitical Strategy service anticipates that Brexit will be delayed beyond October 31st. As a result, uncertainty will continue to weigh on Gilt yields, even though yields have already fallen in line with our BoE Monitor (Chart 4D). We continue to recommend an overweight stance on U.K. Gilts. Chart 4DGilt Yields Have Fallen In Line With Our BoE Monitor Gilt Yields Have Fallen In Line With Our BoE Monitor Gilt Yields Have Fallen In Line With Our BoE Monitor ECB Monitor: Intense Pressure For Easier Monetary Policy Our European Central Bank (ECB) Monitor is now well below the zero line, signaling a strong need for easier monetary policy (Chart 5A). The global manufacturing downturn has hit the export-dependent economies of the euro area hard, with Germany now likely in a technical recession. Our European Central Bank (ECB) Monitor is now well below the zero line, signaling a strong need for easier monetary policy. Despite the weaker growth momentum, there remains far less spare capacity in the euro area economy than at any time since before the 2009 global recession (Chart 5B). This is keeping realized inflation in positive territory, in contrast to what was seen during the previous downturn in 2015-16. Chart 5AEuro Area: ECB Monitor Euro Area: ECB Monitor Euro Area: ECB Monitor Chart 5BEuro Area Inflation Is Subdued, Despite Tight Labor Markets Euro Area Inflation Is Subdued, Despite Tight Labor Markets Euro Area Inflation Is Subdued, Despite Tight Labor Markets The ECB has already responded to the weakening growth & inflation pressures, introducing a new TLTRO program back in March and then cutting the overnight deposit rate and restarting its Asset Purchase Program in September. The latest policy moves were reported to be more contentious, with the “hard money” northern euro area countries opposed to restarting bond purchases. The new incoming ECB President, Christine Lagarde, will likely have her hands full trying to gain consensus on any further easing measures from here, even as both the growth and inflation components of our ECB Monitor indicate that more stimulus is needed (Chart 5C). Chart 5CA Consistent Message On The Need For Future ECB Easing From Growth & Inflation A Consistent Message On The Need For Future ECB Easing From Growth & Inflation A Consistent Message On The Need For Future ECB Easing From Growth & Inflation The big decline in euro area bond yields, which has pushed large swaths of sovereign yields into negative territory, does not look particularly stretched relative to the plunge in the ECB Monitor (Chart 5D). Without signs that the global manufacturing downturn is ending, however, euro area yields will stay mired at current deeply depressed levels. We recommend a moderate overweight on core European government bonds, on a currency-hedged basis into U.S. dollars. Chart 5DBund Rally Looks In Line With The ECB Monitor Bund Rally Looks In Line With The ECB Monitor Bund Rally Looks In Line With The ECB Monitor BoJ Monitor: A Rate Cut On The Horizon? Our Bank of Japan (BoJ) Monitor has drifted slightly below the zero line into “rate cut required” territory (Chart 6A). Over the past few years, the BoJ’s monetary policy has remained unchanged for the most part and its messaging has grown less dovish, citing an expanding economy. However, recent Japanese economic data shows widespread deterioration in growth momentum, as the nation has been hit hard by the global manufacturing and trade recession. Yet even with weaker growth, Japan’s unemployment rate keeps hitting all-time lows. This has not helped boost inflation much, though, with Japan’s CPI inflation still struggling to reach even the 1% level (Chart 6B). Still, the latest leg lower in our BoJ Monitor has been driven by the growth, rather than inflation, components (Chart 6C). Chart 6AJapan: BoJ Monitor Japan: BoJ Monitor Japan: BoJ Monitor Chart 6BNo Spare Capacity In Japan, But Still No Inflation No Spare Capacity In Japan, But Still No Inflation No Spare Capacity In Japan, But Still No Inflation Weakening confidence has resulted in significant declines in both consumer spending and business investment. Due to the struggling domestic economy, it was expected that the Abe government would postpone the scheduled consumption tax hike, but it was finally initiated on October 1st. The timing could not be worse given the ongoing contraction in global manufacturing and trade activity that has clearly spilled over into Japan’s export and industrially-focused economy. Chart 6CThe Slumping Japanese Economy Could Use Some More BoJ Assistance The Slumping Japanese Economy Could Use Some More BoJ Assistance The Slumping Japanese Economy Could Use Some More BoJ Assistance The BoJ will likely try and deliver some sort of easing in the next few months, but its options are limited after years of already hyper-easy policy. A modest rate cut is likely all that will be delivered, on top of a continuation of the Yield Curve Control policy. That will be enough to keep JGB yields at depressed levels (Chart 6D), even if global yields were to begin climbing. Chart 6DJGB Yields Look Fairly Valued Vs The BoJ Monitor JGB Yields Look Fairly Valued Vs The BoJ Monitor JGB Yields Look Fairly Valued Vs The BoJ Monitor BoC Monitor: Rate Cuts Needed, But Will The BoC Deliver? The Bank of Canada (BoC) Monitor has been below zero since April of this year, indicating a need for easier monetary policy (Chart 7A). Although the BoC has maintained its policy rate at 1.75%, dovish Fed policy and softening domestic economic growth are making it harder for the BoC to continue sitting on its hands Although the Canadian labor market remains solid, household consumption has continued to weaken alongside falling consumer confidence. However, the inflation rate for both headline and core CPI measures is still hovering near the mid-point of BoC 1-3% target range (Chart 7B). Chart 7ACanada: BoC Monitor Canada: BoC Monitor Canada: BoC Monitor Chart 7BRising Inflation Making The BoC’s Job Harder Rising Inflation Making The BoC's Job Harder Rising Inflation Making The BoC's Job Harder At the moment, our BoC Monitor is more influenced by weaker growth components than stabilizing inflation components (Chart 7C). Similar mixed messages are also evident in other data. According to the latest BoC Business Outlook Survey, the overall outlook has edged up to the historical average,2 but real capex growth remains in negative territory and manufacturing new orders are still falling. In contrast, the Canadian labor market remains tight and both wage and price inflation are holding firm. Chart 7CBoC Growth & Inflation Components Signaling Moderate Pressure To Ease BoC Growth & Inflation Components Signaling Moderate Pressure To Rise BoC Growth & Inflation Components Signaling Moderate Pressure To Rise Canadian government bonds have rallied strongly this year, but the yield momentum has appeared to overshoot the decline in our BoC Monitor (Chart 7D). The Canadian OIS curve is discounting -27bps of rate cuts over the next twelve months, but the BoC is not signaling that they will ease. We upgraded our recommended stance on Canadian government bonds to neutral back in May, and we see no need to alter that view without further evidence of more deterioration in Canadian growth or inflation data.3 Chart 7DCanadian Bond Rally Looks A Bit Stretched Canadian Bond Rally Looks A Bit Stretched Canadian Bond Rally Looks A Bit Stretched RBA Monitor: Expect Another Cut The Reserve Bank of Australia (RBA) Monitor has been below the zero line since September 2018, indicating a need for easier monetary policy (Chart 8A). The RBA has already delivered on that signal this year, cutting the Cash Rate twice to an all-time low of 0.75%. Markets are still expecting more, with the Australian OIS curve discounting another -29bps of cuts over the next year, although most of those cuts are expected to occur within the next six months. The signal from our RBA Monitor suggests that Australian bond yields should remain under downward pressure, although the yield momentum has been excessive relative to the fall in the Monitor. Both headline and core CPI inflation remain below the RBA’s 2-3% target range (Chart 8B), and the central bank continues to lower its inflation forecasts, suggesting an entrenched dovish bias. Chart 8AAustralia: RBA Monitor Australia: RBA Monitor Australia: RBA Monitor Chart 8BNo Inflation For The RBA To Worry About No Inflation For The RBA To Worry About No Inflation For The RBA To Worry About The latest downturn in our RBA Monitor is related to declines in both the inflation and growth components (Chart 8C). The weakness in the growth components is led by falling exports to Asia, in addition to the sharp drop in house prices in the major cities. The fall in the inflation components reflects both weak inflation expectations and spare capacity in labor markets. Chart 8CA Loud & Clear Message On The Need For RBA Easing A Loud & Clear Message On The Need For RBA Easing A Loud & Clear Message On The Need For RBA Easing The signal from our RBA Monitor suggests that Australian bond yields should remain under downward pressure, although the yield momentum has been excessive relative to the fall in the Monitor (Chart 8D). Australia’s economy will not begin to outperform again, however, until China’s current growth slump starts to bottom out, which is unlikely to occur until the first quarter of 2020 at the earliest. Thus, we expect the RBA to deliver another rate cut before the end of the year, justifying a continued overweight stance on Australian government bonds. Chart 8DA Lot Of Bad News Discounted In Australian Bond Yields A Lot Of Bad News Discounted In Australian Bond Yields A Lot Of Bad News Discounted In Australian Bond Yields RBNZ Monitor: More Easing To Come Our Reserve Bank of New Zealand (RBNZ) monitor remains well below zero, indicating that easier monetary policy is still required (Chart 9A). The central bank has already delivered two rate cuts this year: a -25bps cut in May and, more importantly, a shock rate cut of -50bps in August. Forward guidance remains dovish, with RBNZ Governor Adrian Orr signaling more easing is likely and even hinting at negative rates in the future. This rhetoric is reflected in the NZ OIS curve, which is pricing in a further -42bps of easing over the next twelve months. High inflation is not a constraint for the RBNZ. Both headline and core measures of inflation are currently at 1.7% (Chart 9B). As the RBNZ targets a 1-3% range over the medium term, the prospect of overshooting the 2% longer-term target will not restrict policymakers from acting as appropriate to boost growth. Chart 9ANew Zealand: RBNZ Monitor New Zealand: RBNZ Monitor New Zealand: RBNZ Monitor Chart 9BNZ Inflation Creeping Higher NZ Inflation Creeping Higher NZ Inflation Creeping Higher Most of the pressure to ease has come from the continued deterioration in the growth component of our RBNZ Monitor (Chart 9C), reflecting weakness in manufacturing and consumption. The manufacturing PMI is currently in contractionary territory at 48.4, having fallen almost five points since February of this year. Annual growth in retail sales has been slowing for the past two years while consumer confidence is at 7-year lows. Chart 9CWeak Growth Is The Reason RBNZ Rate Cuts Are Needed Weak Growth Is The Reason RBNZ Rate Cuts Are Needed Weak Growth Is The Reason RBNZ Rate Cuts Are Needed We feel confident in reiterating our bullish recommendation on NZ government bonds versus U.S. and German sovereign debt. The RBNZ Monitor suggests that policy will stay dovish for some time, while NZ yields still offer a relatively attractive yield, unlike deeply overbought Treasuries and Bunds (Chart 9D). Chart 9DStill A Bullish Case For New Zealand Government Bonds Still A Bullish Case For New Zealand Government Bonds Still A Bullish Case For New Zealand Government Bonds Riksbank Monitor: Watching And Waiting Our Riksbank Monitor remains very slightly below zero and the market is currently priced for -4bps of rate cuts over the next year (Chart 10A). The Riksbank has decided to hold the Repo Rate constant at -0.25% while forecasting a hike towards the end of this year or the beginning of 2020. Given the policy environment, rate cuts remain unlikely. At most, the Riksbank can further delay rate hikes if the data continues to disappoint. The Riksbank noted in its September Monetary Policy Report that the unexpectedly weak development of the labor market indicates that resource utilization will normalize sooner than expected. This is reflected in Chart 10B, where the unemployment gap is now negative. Meanwhile, inflation readings are giving a mixed signal for the central bank. While the headline CPI measure has declined precipitously year-to-date, owing to the dramatic fall in oil prices, core inflation has continued to climb steadily. Chart 10ASweden: Riksbank Monitor Sweden: Riksbank Monitor Sweden: Riksbank Monitor Chart 10BMixed Messages From Swedish Inflation Mixed Messages From Swedish Inflation Mixed Messages From Swedish Inflation As a result, the inflation components of our Riksbank monitor - driven by a spike in the Citigroup Inflation Surprise Index, wage growth hooking upward and inflation expectations holding firm around 2% - are signaling the need for tighter monetary policy (Chart 10C). However, the growth components – led by weak exports, employment, and manufacturing data - are exerting pressure in the opposite direction. This is evident in the Swedish Manufacturing PMI, which tumbled from 51.8 to 46.3 in September, deep into contractionary territory. Chart 10CThere Is A Reason Why The Riksbank Has Been On Hold There Is A Reason Why The Riksbank Has Been On Hold There Is A Reason Why The Riksbank Has Been On Hold Keeping in mind the inflation constraint, it remains unlikely that the Riksbank will cut rates unless the economic data disappoints more significantly to the downside. This should help put a floor under Swedish bond yields in the near term (Chart 10D). Chart 10DSwedish Yields Have Fallen Too Far, Too Fast Swedish Yields Have Fallen Too Far, Too Fast Swedish Yields Have Fallen Too Far, Too Fast Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com   Ray Park, CFA Research Analyst ray@bcaresearch.com   Shakti Sharma Research Associate shaktis@bcaresearch.com Footnotes * NOTE: All information in this report reflects our knowledge of global events as of Thursday, October 10. 1 Please see BCA Global Fixed Income Strategy Special Report “United Kingdom: Cyclical Slowdown Or Structural Malaise?” dated September 20, 2019, available at gfis.bcaresearch.com. 2https://www.bankofcanada.ca/2019/06/business-outlook-survey-summer-2019/ 3 Please see BCA Global Fixed Income Weekly Report, “Reconcilable Differences” dated May 8, 2019, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index BCA Central Bank Monitor Chartbook: Intensifying Pressure To Ease BCA Central Bank Monitor Chartbook: Intensifying Pressure To Ease Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights Currency markets continue to fight a tug-of-war between deteriorating global growth and easing global financial conditions. Such an environment is typically fertile ground for a dollar bull market, yet the trade-weighted dollar is up only 2.3% this year. The lack of more-pronounced strength in the greenback suggests that other powerful underlying forces are preventing the dollar from gapping higher. The breakdown in the bond-to-gold ratio is an important distress signal for dollar bulls. As both political and economic uncertainty remain elevated, likely winners in the interim remain safe-haven currencies such as the yen and the Swiss franc. For the remainder of the year, portfolio managers should focus on relative value trades at the crosses, rather than outright dollar bets. Stand aside on the pound for now. Aggressive investors can place a buy stop at 1.25 and sell stop at 1.20. The Riksbank’s hawkish surprise was a welcome development for the krona. Remain long SEK/NZD. The SEK might be the best-performing G10 currency over the next five years. Feature Yearly performance is an important benchmark for most portfolio managers. As most CIOs return to their desks from a summer break, they will be looking at a few barometers to help them navigate the rest of 2019. On the currency front, here is what the report card looks like so far: The dollar has been a strong currency, but the magnitude of the increase has been underwhelming, given market developments. The Federal Reserve’s trade-weighted dollar is up only 2.3% this year. In contrast, the yen is up 3.6% and the Canadian dollar 2.3%. Meanwhile, the best shorts have been the Swedish krona (down 9.7%) and the kiwi. Through the lens of the currency market, the dollar has been in a run-of-the-mill bull market, rather than in a panic buying frenzy (Chart I-1). Chart I-1A Report Card On Currency Performance Preserving Capital During Riot Points Preserving Capital During Riot Points Gold has broken out in every major currency. This carries a lot of weight because it has occurred amid dollar strength, a historical rarity. Importantly, the breakout culminates the seven-or-so-year pattern where gold was stable versus many major currencies (Chart I-2). We are no technical analysts, but ever since gold peaked in 2011, all subsequent rallies have seen diminishing amplitude, which by definition were bull traps. This appeared to have changed since 2015-2016, which could be a signal that the dollar bull market is nearing an end. Commodities have been a mixed bag. Precious metals have surged alongside gold. Despite the recent correction, oil is still up 13.8% for the year. Meanwhile, natural gas is in a bear market. Among metals, nickel has surged 70%, while Doctor Copper is down 5.1%. The only semblance of agreement is among soft commodities, which have been mostly deflating (Chart I-3). In short, there has been no coherent theme for commodity currencies. All the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation.  Equities have performed well across the board, mostly up double digits. The only notable laggards have been in Asia, specifically Japan, Hong Kong and Korea. That said, of all the talk of a Sino-U.S. trade war, Chinese A-shares are up 18.7% for the year. This more than makes up for any CNY depreciation. This also suggests that capital flows into equities have not been a major driver of currencies this year. Chart I-2Gold Has Been The Ultimate Currency Gold Has Been The Ultimate Currency Gold Has Been The Ultimate Currency Chart I-3Commodities Are A Mixed Bag Commodities Are A Mixed Bag Commodities Are A Mixed Bag Yields have collapsed, with higher-beta markets seeing bigger drops. Differentials have mostly moved against the dollar in recent weeks as the U.S. 10-year yield plays catch-up to the downside. One important question is that with Swiss 10-year yields now at -0.96% and German yields at -0.67%, is there a theoretical floor to how low bond yields can fall (Chart I-4)? Chart I-4Yields Have Melted Yields Have Melted Yields Have Melted Heading back to his office, the CIO is now pondering how to deploy fresh capital. On one hand, the typical narrative that we have been operating in the quadrant of a deflationary bust, given the trade war, manufacturing recession, political unrest and rapidly rising probability of recession is not clearly visible in financial data. This would have been historically dollar bullish, and negative for other asset classes. However, the plunge in bond yields begs the question of whether this is a prelude to worse things to come. A more sanguine assessment is that we might be at a crossroads of sorts. If economic data continues to deteriorate due to much larger endogenous factors, a defensive strategy is clearly warranted. One way to tell will be an emerging divergence between our leading indicators and actual underlying data. On the flip side, any specter of positive news could light a fire under sectors, currencies and countries that have borne the brunt of the slowdown. Time is of the essence, and strategy will be dependent on horizons. A review of the leading indicators for the major economic blocks is in order. Are We At The Cusp Of A Recession? Centripetal systems tend to stay in equilibrium, while centrifugal forces can explode in spectacular fashion. In the currency world, this means that the tug of war between deteriorating global growth and easing liquidity conditions cannot last forever. Either the dollar breakout morphs into a panic buying frenzy or proves to be a bull trap. Are we at the cusp of a bottom in global growth, or approaching a riot point? Let us start with the economic front: U.S.: Plunging U.S. bond yields have historically been bullish for growth. More importantly, the recent decline in the ISM Manufacturing Index is approaching 2008 recessionary levels. Either easing in financial conditions revive the index, or the decoupling persists for a while longer. The tone on the political front appears reconciliatory, which means September and October data will be critical. In 2008, the divergence between deteriorating economic conditions and falling yields was an important signpost for a riot point (Chart I-5). Eurozone: The Swedish manufacturing PMI ticked up to 52.4 in August. Most importantly, the new orders-to-inventories ratio is suggesting that the German (and European) manufacturing recession is reversing (Chart I-6). For all the debate about whether China is stimulating enough or not, the beauty about this indicator is that there are no Chinese variables in it (the euro zone and Sweden export a lot of goods and services to China). Any surge higher in this indicator will categorically conclude the euro zone manufacturing recession is over, lighting a fire under the euro in the process. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate.  China: Chinese bond yields have melted alongside global yields. This is reflationary, given the liberalization in the bond market over the past few years. Policy makers are currently discussing the quota for next year’s fiscal spending. Whatever the number is, if it can stabilize Chinese growth, a powerful deflationary force that dictated markets in 2018-2019 will dissipate. Chart I-5Is U.S. Manufacturing Close ##br##To A Bottom? Is U.S. Manufacturing Close To A Bottom? Is U.S. Manufacturing Close To A Bottom? Chart I-6Is Eurozone Manufacturing Close To A Bottom? Is Eurozone Manufacturing Close To A Bottom? Is Eurozone Manufacturing Close To A Bottom? Discussions among industry specialists suggest some anecdotal evidence that many manufacturers have been engaged in re-routing channels and parallel manufacturing chains to avoid the U.S.-China tariffs. This is welcome news, since global exports and global trade are still in a downtrend. A key barometer to watch on whether the global slowdown is infecting domestic demand will be Chinese imports (Chart I-7). So far, the message is that traditional correlations have not yet broken down. As a contrarian, this is positive. Manufacturing slowdowns have tended to last 18 months peak-to-trough, the final months of which are characterized by fatigue and capitulation. However, unless major imbalances exist (our contention is that so far they do not), mid-cycle slowdowns sow the seeds of their own recovery via accumulated savings and pent-up demand. In the currency world, the dollar has tended to be an excellent counter-cyclical barometer. On the dollar, the bond-to-gold ratio is breaking down, in contrast to the rise in the DXY. This is not a sustainable divergence (Chart I-8). The last time the bond-to-gold ratio diverged from the DXY was in 2017, and that proved extremely short-lived. As global growth rebounded and U.S. repatriation flows eased, dollar support was quickly toppled over. Chart I-7Chinese Imports Could Soon Rebound Chinese Imports Could Soon Rebound Chinese Imports Could Soon Rebound Chart I-8Mind The Gap Mind The Gap Mind The Gap Ever since the end of the Bretton Woods agreement broke the gold/dollar anchor in the early 1970s, bullion has stood as a viable threat to dollar liabilities, capturing the ebbs and flows of investor confidence in the greenback tick-for-tick. While U.S. yields remain attractive, portfolio outflows and a deteriorating balance-of-payments backdrop will keep longer-term investors on the sidelines. Chart I-9Dollar Bulls Need A More Hawkish Fed Dollar Bulls Need A More Hawkish Fed Dollar Bulls Need A More Hawkish Fed Capital tends to gravitate towards higher returns, and the U.S. tax break in 2017 was a one-off that is now ebbing. Meanwhile, despite wanting to resist the appearance of influence from President Trump, the Fed realises that the neutral rate of interest in the U.S. is now below its target rate, which should keep them on an easing path. A dovish Fed has historically been bearish for the dollar (Chart I-9). Bottom Line: In terms of strategy, heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength. Our favorite plays remain the Swedish krona, the Norwegian krone, and, for insurance purposes, the Japanese yen. Outright dollar shorts await confirmation from more economic data. What To Do About CAD? The Bank of Canada (BoC) decided to stay on hold at its latest policy meeting. This was highly anticipated, but the silver lining is that the BoC might later reflect on this move as a policy mistake, given the arms race by other central banks to ease policy. The three most important variables for the Canadian economy are a:) what is happening to the U.S. economy, b:) what is happening to crude oil prices and c:) what is happening to consumer leverage and the housing market. On all three fronts, there has been scant good news in recent weeks. Heightened uncertainty can keep the greenback bid in the coming weeks, but we will be sellers on strength.  The Nanos Investor Confidence Index suggests Canadian GDP might be at the cusp of a slowdown after an excellent run of a few quarters (Chart I-10). One of the key drivers for the CAD/USD exchange rate is interest rate differentials with the U.S., and the compression in rates could run further (Chart I-11). Unless the BoC adopts a looser monetary stance, a rising exchange rate is likely to tighten financial conditions. Rising energy prices will be a tailwind, but the Western Canadian Select discount, and persistent infrastructure problems are headwinds. As such, we think domestic conditions will continue to knock down whatever benefit comes from rising oil prices. Chart I-10Canadian Data Has##br## Been Firm Canadian Data Has Been Firm Canadian Data Has Been Firm Chart I-11A Firm Exchange Rate Could Tighten Financial Conditions A Firm Exchange Rate Could Tighten Financial Conditions A Firm Exchange Rate Could Tighten Financial Conditions On the consumer side, real retail sales are deflating at the worst pace since the financial crisis, but consumer confidence remains elevated given the robust labor market data (Chart I-12). However, if house prices continue to roll over, confidence is likely to crater (Chart I-13). Chart I-12Canada: Consumer Spending Is Weak Canada: Consumer Spending Is Weak Canada: Consumer Spending Is Weak Chart I-13Canada: The Housing Market Is Softening Canada: The Housing Market Is Softening Canada: The Housing Market Is Softening On the corporate side of the equation, the latest Canadian Business Outlook Survey suggests there has been no meaningful revival in capital spending. This is a big headwind, since Canada finances itself externally rather than via domestic savings. For external investors, the large stock of debt in the Canadian private sector and overvaluation in the housing market are likely to continue leading to equity outflows (from bank shares) on a rate-of-change basis (Chart I-14). Chart I-14Foreign Investors Are Fleeing Canadian Securities Foreign Investors Are Fleeing Canadian Securities Foreign Investors Are Fleeing Canadian Securities Technically, the USD/CAD failed to break below the upward sloping trend line drawn from its 2012 lows, and the series of lower highs since the 2016 peak is forcing the cross into the apex of a tight wedge. The next resistance zone on the downside is the 1.30-1.32 level. Our bias is that this zone will prove to be formidable resistance. We continue to recommend investors short the CAD, mainly via the euro. Housekeeping We were stopped out of our short XAU/JPY position amid fervent buying in gold. Even though we are gold bulls, the rationale behind the trade was that the ratio of the two safe havens was at a speculative extreme. We will stand aside for now and look to re-establish the position in the near future. The Risksbank left rates on hold this week. This was welcome news for our long SEK/NZD position. The weakness in the SEK this year was expected given the surge in summer volatility, but the magnitude of the fall took us by surprise. In general, as soon as President Trump ramped up the trade-war rhetoric and China started devaluing the RMB, the environment became precarious for all pro-cyclical currencies. In terms of strategy going forward, the SEK probably has some additional downside, but not a lot. It is currently the cheapest currency in the G10. Should the Riksbank be actively trying to weaken the currency ahead of ECB policy stimulus this month, the final announcement, depending on what it entails, might be the bottom for the SEK and top for the EUR/SEK. Finally, as the Brexit drama unfolds, the outlook for the pound is highly binary. Aggressive investors can place a buy stop at 1.25 and a sell stop at 1.20. Anything in between should be regarded as noise.    Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 USD Technicals 1 USD Technicals 1 Chart II-2USD Technicals 2 USD Technicals 2 USD Technicals 2 Recent data in the U.S. have been firm: PCE deflator nudged up from 1.3% to 1.4% year-on-year in July. Core PCE was unchanged at 1.6% year-on-year. Michigan consumer sentiment index fell from 92.1 to 89.8 in August. Trade deficit narrowed marginally by $1.5 billion to $54 billion in July. Notably, the trade deficit with China increased by 9.4% to $32.8 billion in July. Initial jobless claims was little changed at 217 thousand for the past week. Unit labor cost increased by 2.6% in Q2. Nonfarm productivity remained unchanged at 2.3%. Factory orders increased by 1.4% month-on-month in July. More importantly on the PMI front, Markit manufacturing PMI was down from 50.4 in July to 50.3 in August. ISM manufacturing PMI deteriorated to 49.1 in August, while ISM non-manufacturing PMI increased to 56.4, up from the previous 53.7 and well above estimates. DXY index fell by 0.5% this week. The recent worries about a near-term recession since the 10/2 yield curve inverted last month has been supporting the dollar, together with possible additional tariffs against China and the Chinese yuan devaluation. Going forward, we believe the dollar strength will ebb, given fading interest rate differentials. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 USD/CNY And Market Turbulence - August 9, 2019 Focusing On the Trees But Missing The Forest - August 2, 2019 The Euro Chart II-3EUR Technicals 1 EUR Technicals 1 EUR Technicals 1 Chart II-4EUR Technicals 2 EUR Technicals 2 EUR Technicals 2 Recent data in the euro area have been firm: Unemployment rate was unchanged at 7.5% in July. Both headline and core preliminary inflation were unchanged at 1% and 0.9% year-on-year respectively in August. PPI fell from 0.7% to 0.2% year-on-year in July. On the PMI front, Markit composite PMI was little changed at 51.9 in August. Manufacturing component was unchanged at 47, while services component nudged up slightly to 53.5. Retail sales growth fell from upwardly-revised 2.8% to 2.2% year-on-year in July, still better than the estimated 2%. EUR/USD appreciated by 0.5% this week. While the manufacturing sector across Europe remain depressed, the services sector seems to be alive and well. The ECB monetary policy meeting next Thursday will be key for the path of the euro. Report Links: Battle Of The Central Banks - June 21, 2019 EUR/USD And The Neutral Rate Of Interest - June 14, 2019 Take Out Some Insurance - May 3, 2019 The Yen Chart II-5JPY Technicals 1 JPY Technicals 1 JPY Technicals 1 Chart II-6JPY Technicals 2 JPY Technicals 2 JPY Technicals 2 Recent data in Japan have been mixed: Housing starts fell by 4.1% year-on-year in July. Construction orders increased by 26.9% year-on-year in July, a positive shift from 4.2% contraction in the previous month. Capital spending growth slowed to 1.9% in Q2. Manufacturing PMI fell slightly to 49.3 in August, while services PMI jumped from 51.8 to 53.3. USD/JPY increased by 0.5% this week. The consumption tax hike in Japan is scheduled for October 1. The tax rate will rise from 8% to 10%, with possible exemption on several goods such as food and non-alcoholic beverages, which could be a drag on domestic spending. That being said, we continue to favor the Japanese yen due to the risk of a recession amid the escalating global trade war. Report Links: Has The Currency Landscape Shifted? - August 16, 2019 Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 Battle Of The Central Banks - June 21, 2019 British Pound Chart II-7GBP Technicals 1 GBP Technicals 1 GBP Technicals 1 Chart II-8GBP Technicals 2 GBP Technicals 2 GBP Technicals 2 Recent data in the U.K. continued to deteriorate: Nationwide house price index was unchanged in August. Markit composite PMI fell to 50.2 in August: Manufacturing component slowed to 47.4; Construction PMI fell to 45; Services component decreased to 50.6. Retail sales contracted by 0.5% year-on-year in August. GBP/USD increased by 1.2% this week. Brexit remains the biggest driver behind the pound. British PM Boris Johnson’s brother resigned this week, citing tension between “family loyalty” and “national interest”. Our Geopolitical Strategy upgraded a no-deal Brexit probability to about 33%, maintaining that it is not the base case since nobody wants an imminent recession. From a valuation perspective, the pound is quite cheap and currently trading far below its fair value. Report Links: Battle Of The Central Banks - June 21, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 Take Out Some Insurance - May 3, 2019 Australian Dollar Chart II-9AUD Technicals 1 AUD Technicals 1 AUD Technicals 1 Chart II-10AUD Technicals 2 AUD Technicals 2 AUD Technicals 2 Recent data in Australia have been mixed: Building approvals keep contracting by 28.5% year-on-year in July. Australian Industry Group (AiG) manufacturing index increased to 53.1 in August. The services index soared to 51.4 in August from a previous reading of 43.9. Current account balance shifted to A$5.9 billion in Q2, the first surplus since 1975. Retail sales contracted by 0.1% month-on-month in July. GDP growth slowed down to 1.4% year-on-year in Q2, the lowest rate in over a decade. Exports and imports both grew by 1% and 3% month-on-month respectively. Trade surplus narrowed marginally to A$7.3 million. AUD/USD increased by 1.4% this week. While Q2 GDP growth rate continued to soften, the current account and PMI data are showing tentative signs of a recovery. On Monday, the RBA kept interest rates unchanged at 1%. In the press release, the Bank acknowledged that low income growth and falling house prices limited household consumption in the first half of the year. Going forward, the tax cuts, infrastructure spending, housing market stabilization, and a healthy resources sector should all support the Australian economy, and put a floor under the Aussie dollar. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns- April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 NZD Technicals 1 NZD Technicals 1 Chart II-12NZD Technicals 2 NZD Technicals 2 NZD Technicals 2 Recent data in New Zealand have been negative: Consumer confidence improved slightly to 118.2 in August. Building permits continued to contract by 1.3% month-on-month in July. Terms of trade increased to 1.6% in Q2. NZD/USD increased by 1.2% this week. In a Bloomberg interview earlier this week, the New Zealand finance minister Grant Robertson expressed his confidence on the fundamentals of the domestic economy, especially the low unemployment rate and sound wage growth. The largest downside risk remains the global trade and manufacturing slowdown. As a small open economy, New Zealand is ultimately vulnerable to exogenous factors, especially those related to its large trading partners including U.S., China, and Australia. On the policy side, the finance minister believes that there is “still room to move” in terms of monetary policy. Report Links: USD/CNY And Market Turbulence - August 9, 2019 Where To Next For The U.S. Dollar? - June 7, 2019 Not Out Of The Woods Yet - April 5, 2019 Canadian Dollar Chart II-13CAD Technicals 1 CAD Technicals 1 CAD Technicals 1 Chart II-14CAD Technicals 2 CAD Technicals 2 CAD Technicals 2 Recent data in Canada have been mostly negative: Annualized Q2 GDP growth jumped from 0.5% to 3.7% quarter-on-quarter, well above estimates. Bloomberg Nanos confidence fell slightly from 57 to 56.4. Markit manufacturing PMI fell to 49.1 in August, right after a small rebound in July to 50.2.  Trade deficit widened to C$1.12 billion in July. USD/CAD fell by 0.5% this week. On Wednesday, BoC held its interest rate unchanged at 1.75%, as widely expected. In its monetary policy statement, the BoC sounded cautiously dovish, and expects economic activity to slow in the second half of the year amid global growth worries. The strong Q2 rebound was mostly driven by cyclical energy production and robust export growth, which could be temporary given the current market volatility. The rate cut probability next month is currently at 40%. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swiss Franc Chart II-15CHF Technicals 1 CHF Technicals 1 CHF Technicals 1 Chart II-16CHF Technicals 2 CHF Technicals 2 CHF Technicals 2 Recent data in Switzerland have been positive: KOF leading indicator was unchanged at 97 in August. Real retail sales grew by 1.4% year-on-year in July, up from the previous 0.7%. Manufacturing PMI increased to 47.2 in August, up from 44.7 in the previous month. Headline inflation remained muted at 0.3% year-on-year in July. GDP yearly growth slowed to 0.2% in Q2, from a downwardly-revised 1% in Q1. USD/CHF fell by 0.2% this week. We remain positive on the Swiss franc. The global economic slowdown and increasing worries about a near-term recession remain tailwind for the safe-haven franc.  Report Links: What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Balance Of Payments Across The G10 - February 15, 2019 Norwegian Krone Chart II-17NOK Technicals 1 NOK Technicals 1 NOK Technicals 1 Chart II-18NOK Technicals 2 NOK Technicals 2 NOK Technicals 2 Recent data in Norway have been mostly negative: Retail sales increased by 0.9% year-on-year in July. Current account surplus plunged by 60% from NOK 73.1 billion to NOK 30.6 billion in Q2, the lowest since Q4 2017. USD/NOK fell by 1.3% this week. The rebound in oil prices this week has supported petrocurrencies. On the supply side, the production discipline is likely to be maintained. On the demand side, fiscal stimulus globally should revive overall demand. A potential weaker USD should also support oil prices in the second half of the year, which will be bullish for the Norwegian krone. Report Links: Portfolio Tweaks Into Thin Summer Trading - July 5, 2019 On Gold, Oil And Cryptocurrencies - June 28, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 Swedish Krona Chart II-19SEK Technicals 1 SEK Technicals 1 SEK Technicals 1 Chart II-20SEK Technicals 2 SEK Technicals 2 SEK Technicals 2 Recent data in Sweden have been mixed: Manufacturing PMI increased slightly to 52.4 in August, from 52 in the previous month. Current account surplus narrowed from SEK 63 billion to SEK 37 billion in Q2. Industrial production increased by 3.2% year-on-year in July. Manufacturing new orders increased by 0.4% in July compared with last month. However, on a year-on-year basis, it fell by 2.2%. The Swedish krona rallied this week, appreciating by 1.4% against USD. The Riksbank held its interest rate unchanged at -0.25% this Thursday, and stated that they still plan to raise interest rates this year or early next, but at a slower pace than the previous forecast. Report Links: Where To Next For The U.S. Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Dear Client, Please note that there will be no regular Weekly Report next week, as we take a summer break. Our regular publication will resume September 6th. Best regards, Chester Ntonifor, Vice President Foreign Exchange Strategy Highlights Our PPP models show the DXY index to be overvalued by 10-15%. Within the G10 universe, the cheapest currencies are the Swedish krona, the British pound, the Japanese yen and the Norwegian krone. Look to go short CHF/GBP on valuation grounds. Feature Regular readers of our publication will notice that we tend to adhere to very simple and time-tested ideas. One such is the concept of purchasing power parity (PPP). The beauty comes from its simplicity. If the price of a good in Sweden is rising faster than in South Africa, then the krona should depreciate versus the rand to equalize prices across both borders. Otherwise, the krona becomes incrementally expensive, relative to the rand. In practice, various models have shown PPP to be a very poor tool for managing currencies. One roadblock comes from measurement issues, since consumer price baskets tend to differ in composition from one country to the next. Second, there is less price discovery for services, than there is for tradable goods. For example, it is rather difficult to import a haircut from Mumbai into the U.S., and so arbitraging those prices away tends to be impractical. Tariffs, trade restrictions and transport costs also tend to dampen the explanatory power of PPP models, though those have had diminishing importance over time. In order to get closer to an apples-to-apples comparison across countries, we make two adjustments. First, we divide the consumer price index (CPI) baskets into five major groups. In most cases, this breakdown captures 90% of the national CPI basket: Food, restaurants and hotels Shelter Health, culture and recreation Energy and transportation Household goods The second adjustment is to run two regressions with the exchange rate as the dependent variable. The first regression (call it REG1) uses the relative price ratios of the five groups as independent variables. This allows us to observe the most influential price ratios that help explain variations in the exchange rate. The second regression (call it REG2) uses a weighted average combination of the five groups to form a synthetic relative price ratio. If for example, shelter is 33% in the U.S. CPI basket, but 19% in the Swedish CPI basket, relative shelter prices will represent 26% of the combined price ratio. This allows for a uniform cross-sectional comparison, compared to using the national CPI weights. The results were largely consistent: Both regressions were statistically significant, but more so for REG1. This makes intuitive sense, as the number of variables were higher in the first regression. The sign for household goods was negative for some countries. This could be due to some specter of multicollinearity, if the tradable goods price effect is captured in other categories. There is also the low value-to-weight ratio for many household goods such as refrigerators or air conditioners, which could make currency deviations from PPP persistent. The shelter sign was also negative for some countries, meaning rising shelter prices tended to be associated with an incrementally cheaper currency. This could be due to the Balassa-Samuelson effect. Rising incomes (one key determinant of rising house prices) usually reflect rising productivity levels, which tend to lift the fair value of the exchange rate. The results showed the U.S. dollar as overvalued, especially versus the Swedish krona, British pound and Norwegian krone. Commodity currencies were closer to fair value, and within the safe haven complex, the Japanese yen was more attractive than the Swiss franc. The euro was less undervalued than implied by the overvaluation in the DXY index. As a final note, PPP models are just an additional kit to our currency toolbox, and so should never be used in isolation, but in conjunction with other currency signals. This is just a first iteration in our PPP modelling work, which we intend to improve in the months to come. U.S. Dollar We reverse-engineered the fair value for the DXY index by aggregating the model results from its six constituents. This includes the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc, using the corresponding DXY weights. The message from the synthetic model is clear: the U.S dollar is above its fair value, in line with our fundamental view (Chart 1). Chart 1The Dollar is Slightly Expensive The Dollar is Slightly Expensive The Dollar is Slightly Expensive Americans spent 35% of their income in 2018 on goods and 65% on services. Shelter remains the single largest consumption item for American households, which makes up 33% of the consumption basket. However, the relative importance of shelter is dwarfed by much more rampant rent and house price increases in other developed countries. Medical care accounts for 8.7% of the CPI basket, and is the highest in the developed world on a per capita basis. Total spending on health care accounts for almost 20% of nominal GDP. Since the 1980s, the CPI for medical care has risen fivefold, far outpacing many developed countries. This makes the dollar incrementally expensive.  Core CPI edged higher to 2.2% in July, driven by medical care and shelter. While above the Federal Reserve’s 2% target, the risks to inflation remain asymmetric to the downside. That will keep the Fed on a dovish path near-term, which should help close overvaluation in the dollar. Euro We had limited data for the euro area, and so our regression results were less robust. REG1 shows the euro as cheap, while REG2 is more ambiguous (Chart 2). In short, a PPP model for the euro had one of lowest explanatory powers within the G10 universe. Food, restaurants and hotels are the largest consumption item in the euro CPI basket. Looking at the details, food and non-alcoholic beverages account for 14%, alcohol and tobacco make up 4%, and restaurant and hotels account for about 10% (Table). Relative price trends have moved to undermine the fair value of the euro. Chart 2The Euro Is Slightly Cheap The Euro Is Slightly Cheap The Euro Is Slightly Cheap Euro Area CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Shelter’s weight in the euro area CPI basket currently stands at 16.7%, the smallest among G10 countries. Since 2012, relative house and rent prices in the euro area have been decreasing compared with that in the U.S. Rampant rent controls, especially in places like Germany have subdued housing CPI, and tempered the fair value of the euro. This makes sense to the extent that it represents a concomitant rise in the welfare state. It is well-known that the euro area is relatively open and so tradable goods prices are important for the fair value of the euro. Given that the epicenter of trade tensions is between the U.S. and China, this will act to boost the relative attractiveness of European goods, which will be a bullish underpinning for the euro. Inflation expectations have collapsed in the euro area. However, compared to the Federal Reserve, there is little the European Central Bank can do to boost inflation. This is relatively euro bullish. Once global growth eventually picks up, improved competitiveness in the periphery will allow for non-inflationary growth. Japanese Yen The yen benefits from being cheap, as well as being a safe-haven currency (Chart 3). The overarching theme for Japan is a falling (and rapidly aging) population, which means that deficient demand and falling prices are the norm. This makes the yen relatively attractive on a recurring basis. Most of the Heisei era in Japan has been characterized by deflation. Importantly, all categories in Japan have been in a relative price downtrend during this period (Table). Domestically, an aging population (that tends to be a large voting base), prefer falling prices. Meanwhile, the bursting of the asset bubble in the late 80s/early 90s led to a powerful deleveraging wave that undermined prices. Chart 3The Yen Is Quite Cheap The Yen Is Quite Cheap The Yen Is Quite Cheap Japan CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity The relative prices for most items have been decreasing, but culture and recreation inflation have experienced a meaningful rebound since 2013, largely due to a booming tourism industry in Japan.1 According to tourism statistics, the number of international visitors to Japan reached 31 million in 2018, almost five times the number ten years ago. But as long as the younger generation in Japan continues to save more and consume less, prices will remain under pressure. BoJ Governor Haruhiko Kuroda remains committed to achieving a 2% inflation target, but inflation expectations are falling to historical lows at a time when the BoJ is running out of policy bullets.2  That means inflation will likely lag that of other developed countries, lifting the fair value of the yen. British Pound Both regressions show the pound as undervalued. This supports our view that over the long term, the pound is a categorical buy (Chart 4). The consumption baskets in both the U.K. and the U.S. are roughly similar, which means traditional PPP models do a good job at capturing the true underlying picture of price differentials (Table). For example, OECD PPP models, based on national expenditure, show the pound as 15% undervalued. Chart 4The Pound Is Cheap The Pound Is Cheap The Pound Is Cheap U.K. CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Housing is the largest item in the consumption basket, with a total weight close to 30% (including housing electricity and water supply). The shelter consumer price index in the U.K. started to fall relative to the U.S. in 2016, which has lowered the fair-value of the pound (in the Balassa-Samuelson framework). That said, the fall in the pound has been much more deep and violent than suggested by domestic price fundamentals. For example, food restaurants and hotels are 10% cheaper in the U.K. compared to the U.S. over the last half decade. However, rather than appreciating 10%, the pound has plummeted by about 30%. Brexit will continue to dictate the ebb and flow of sterling gyrations, but the reality is that the pound should be higher on a fundamental basis. Meanwhile, a pick up in the global economy will benefit the pound. Going short CHF/GBP on valuation grounds is an attractive bet today. Australian Dollar As a commodity currency, PPP models are less useful for the Australian dollar than terms of trade, or even interest rate differentials. That said, the Aussie dollar is still relatively cheap versus the USD on a PPP basis (Chart 5). The key driver for value in the AUD has been a drop in the currency, relative to what price differentials will dictate. Food, restaurants and hotels comprise 23% of the Australian CPI basket, with the alcohol and tobacco category alone making up 7.4% (Table). Given food price differentials have been stable versus the U.S. in over a decade, Aussie citizens have not been particularly worse off. Chart 5The Aussie Is Slightly Cheap The Aussie Is Slightly Cheap The Aussie Is Slightly Cheap Australia CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Shelter accounts for almost a quarter percent of the basket. Relative shelter prices in Australia have been rising since the late 1990s, but started to soften in the past few years, on the back of macro prudential measures. Meanwhile, holiday travel and accommodation have a total weight of 6%, of which domestic travel makes up 2.9%, and international travel 3.1%. The overall cost of tourism in Australia has been falling relative to the U.S., boosting the fair value of the Aussie. In the 1980s, inflation in Australia averaged around 8.3% year-on-year. This made the Aussie incrementally expensive, creating grounds for a subsequent 50% devaluation from 1980 to 1986. Inflation targeting was finally introduced and has realigned Aussie prices with the rest of the world. Our bias is that the Aussie will be less driven by price differentials going forward, but more by RBA policy and terms of trade. New Zealand Dollar The New Zealand dollar is at fair value according to both models (Chart 6).  Like the aussie, the kiwi is less driven by price differentials and more by terms of trade. Food and shelter account for the largest share of the consumption basket, and relative prices have not been moving in favor of the kiwi (Table). So, while the kiwi was overvalued earlier this decade, the overvaluation gap has been mostly closed via a higher dollar. Chart 6The Kiwi Is At Fair Value The Kiwi Is At Fair Value The Kiwi Is At Fair Value New Zealand CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Relative shelter prices in New Zealand have been soaring in recent decades compared to the U.S. Higher immigration, foreign purchases and a commodity boom helped. However, in August 2018, the ban on foreign property purchases came into effect, which helped cool down the housing market. Like in Australia, the inflation rate in New Zealand reached 18% year-on-year in the early 1980s, and was subsequently addressed via inflation targeting. This has realigned New Zealand prices somewhat with the rest of the world. Our bias is that going forward, the kiwi will underperform the aussie, mainly because of a negative terms of trade shock. Canadian Dollar The loonie is currently trading below its fair value, according to both of our models (Chart 7).  Shelter remains the largest budget item for Canadian households (Table). The average Canadian household spent C$18,637 on shelter per year, around 29.2% of the total consumption in 2017.3 Interestingly, the shelter consumer price index does not fully capture skyrocketing house prices in Canada over the last decade. Since 2005, Canadian house prices relative to U.S. have doubled, according to OECD. On the contrary, the relative shelter CPI has trended downwards. These crosscurrents have dampened the explanatory power of the exchange rate. Chart 7The Loonie Is Slightly Cheap The Loonie Is Slightly Cheap The Loonie Is Slightly Cheap Canada CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Canadians are avid users of private transportation. The average spending on transportation accounted for 20% of total consumption, the second-largest expenditure item. Relative prices in this category have been rising, which has lowered the fair value of the exchange rate. Canada stands as the sixth largest energy producer in the world, but due to heavy taxation, Canadian consumers are paying more for gas prices than their U.S. neighbors. That said, terms of trade have been more important than PPP concerns for the loonie. In the near term, we believe energy prices (and the Western Canadian Select price spread) will continue to be important for the loonie. Swiss Franc USD/CHF is trading slightly below fair value, despite structural appreciation in the franc in recent years (Chart 8). The largest consumption item in Switzerland is the food, restaurants and hotels category (Table). The second item is shelter. Social services have a higher weight in the CPI basket, compared to other developed nations. This has been a huge driver of relative prices between Switzerland and the rest of the world, with falling relative prices boosting the fair value of the franc. Chart 8The Swiss Franc Is At Fair Value The Swiss Franc Is At Fair Value The Swiss Franc Is At Fair Value Switzerland CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Healthcare notably accounts for 15.5% in the total CPI basket, of which patient services makes up 11.5%. The Swiss healthcare system is a combination of public, subsidized private, and entirely private systems. It is mandatory for a Swiss resident to purchase basic health insurance, which covers a range of treatments. The insured person then pays the insurance premium plus part of the treatment costs. Finally, as a small open economy, tradable goods prices are important for Switzerland. Given high levels of specialization, terms-of-trade in Switzerland are soaring to record highs. This makes the franc a core holding in a currency portfolio. Norwegian Krone The Norwegian krone is undervalued according to both models (Chart 9). Food and shelter account for the largest share of the Norwegian CPI basket (Table). While the share of shelter is lower than in the U.S., other categories share similar weights, allowing traditional PPP models to be adequate for USD/NOK. One difference is that in terms of social services, only 0.2% of the expenditures are allocated to education, since all schools are free in Norway, including universities. Chart 9The Norwegian Krone Is Cheap The Norwegian Krone Is Cheap The Norwegian Krone Is Cheap Norway CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity As a large energy producer, Norwegians pay less for electricity, gas, and other fuels. Norway is also a heavy producer of renewable energy, notably hydropower. This makes the domestic energy basket less susceptible to the ebbs and flows of energy prices. Going forward, the path of energy prices will continue to dictate ebbs and flows in the krone. Meanwhile, long NOK positions also benefit from an attractive valuation starting point.  Swedish Krona The krona is the cheapest currency in our universe by a wide margin (Chart 10). This stems less from fluctuations in relative prices and more from negative rates that have hammered the exchange rate. Like many countries, food and shelter is the largest component of the consumption basket (Table). Transportation is also important. However, an important driver for undervaluation in the currency has been a drop in the relative price of social services. Chart 10The Swedish Krona Is Very Cheap The Swedish Krona Is Very Cheap The Swedish Krona Is Very Cheap Sweden CPI Weights A Fresh Look At Purchasing Power Parity A Fresh Look At Purchasing Power Parity Sweden experienced very high inflation rates in the 1980s, and since then, has been in a disinflationary regime. More recently, the inflation rate has edged down below the Riksbank’s target, mostly dragged down by recreation, culture, and healthcare. This makes Swedish real rates relatively attractive. We remain positive on the Swedish krona and believe that it will be one of the first to benefit, should global growth pick up.   Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com   Kelly Zhong, Research Analyst kellyz@bcaresearch.com Footnotes 1 We removed the shelter component in regression 1, since it was distorting results. 2 Please see Foreign Exchange Strategy Weekly Report, titled “Short USD/JPY: Heads I Win, Tails I Don’t Lose Too Much”, dated May 31, 2019, available at fes.bcaresearch.com 3 Please see “Survey of Household Spending, 2017,” Statistic Canada, December 12, 2018. Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights Our intermediate-term timing models are not sending any strong signals at the moment. That means the balance of forces could tilt the greenback in either way, in what appears to be a stalemate for the U.S. dollar so far.  We are maintaining a pro-cyclical currency stance, but have a few portfolio hedges in the event we are caught offside in what could be a volatile summer. Stay long petrocurrencies versus the euro. Remain short USD/JPY. Also hold a short basket of gold bullion versus the yen. Feature Chart 1Major Peak In The Bond-To-Gold Ratio Major Peak In The Bond-To-Gold Ratio Major Peak In The Bond-To-Gold Ratio Regular readers of our publication are well aware that we have maintained a pro-cyclical stance over the past few months, a view that has been underpinned by a few tectonic forces moving against the U.S. dollar. The reality is that the DXY index has been stuck in a broad range of 96 to 98 for most of this year, failing to decisively breakout or breakdown in what has largely been an extremely frustrating stalemate for traders. Our rationale for a breakdown in the dollar was outlined in a Special Report 1 we penned in March, and the arguments still hold true today (Chart 1).    Over the next few weeks, we will be going back to the drawing board to see if and where we could be offside in this view. We start this week with a review of our intermediate-term timing models. Back in 2016, we developed a set of currency indicators to help global portfolio managers increase their Sharpe ratio in managing currency exposure. The idea was quite simple: For every developed-world country, there were three key variables that influenced the near-term path of its exchange rate versus the U.S. dollar. Interest Rate Differentials: Under the lens of interest rate parity, if one country is expected to have lower interest rates versus another one, the incumbent’s currency will fall today so as to gradually appreciate in the future and nullify the interest rate advantage. This sounds vaguely familiar for the U.S. dollar. Inflation Differentials:  Assuming no transactional costs, the price of sandals cannot be relatively high and rising in Mumbai versus Auckland. Either the Indian rupee needs to fall, the kiwi rise, or a combination of the two has to occur to equalize prices across borders. This concept originated from the School Of Salamanca in 16th century Spain, and still applies to this day in the form of Purchasing Power Parity (PPP). Risk factor: Exchange rates are not government bonds in that few treasury departments and central banks can guarantee a par value on them. Ergo, the ebb and flow of risk aversion will have an impact on the Norwegian krone as well as the yen. Gauging the balance of forces for this risk is important. For all countries, the variables are highly statistically significant and of the expected signs. These models help us understand in which direction fundamentals are pushing the currency. We hereto refer to these as Fundamental Intermediate-Term Models (FITM). Including the momentum variable helps fine-tune the models. Real rate differentials, junk spreads and commodity prices remain statistically significant and of the correct sign.  A final adjustment is one for momentum. Including a 52-week moving average for each cross helps fine-tune the models for trend. Real rate differentials, junk spreads and commodity prices remain statistically very significant and of the correct sign. They are therefore trend- and risk-appetite adjusted UIP-deviation models. These models are more useful as timing indicators on a three- to nine-month basis, as their error terms revert to zero much faster. We refer to these as Intermediate-Term Timing Models (ITTM). For the most part, our models have worked like a charm. On a risk-adjusted return basis, a dynamic hedging strategy based on our ITTMs has outperformed all static hedging strategies for all investors with six different home currencies since 2001.2 Even in the very long run of 41 years – from August 1976 – a simple momentum-based dynamic hedging strategy outperforms static ones for investors with five home currencies, with only the AUD portfolio being worse off. These results give us confidence to continue running these models as a sanity check for our ever-shifting currency biases. The U.S. Dollar Chart 2No Major Mispricing In The U.S. Dollar No Major Mispricing In The U.S. Dollar No Major Mispricing In The U.S. Dollar Chart 3More Upside Is Possible More Upside Is Possible More Upside Is Possible The approach for modelling the U.S. dollar was twofold. First, we estimated the fair value of each of the DXY constituents, and reconstructed an index based on DXY weights – a bottom-up fair-value DXY, if you will. Second, we ran our three variables against the DXY index. Averaging both approaches gave us similar results to begin with. The dollar is currently sitting in a neutral zone, with two opposing forces holding it in stalemate. The Federal Reserve’s dovish shift is moving real interest rate differentials against the dollar, but budding risk aversion judging from the combination of junk bond spreads and commodity prices are keeping the dollar bid. The call on the dollar will be critical for currency strategy, and our bias is that a breakdown is imminent based on the bond-to-gold ratio. That said, the breakdown will require the final pillars of dollar support to crack, which would come from a nascent rebound in global growth and/or an easing in the dollar liquidity shortage. We will be watching these developments like hawks. The Euro Chart 4No Major Mispricing In The Euro No Major Mispricing In The Euro No Major Mispricing In The Euro Chart 5EUR/USD Is Not Particularly Cheap EUR/USD Is Not Particularly Cheap EUR/USD Is Not Particularly Cheap The model results for the euro are the mirror image of the dollar, with no evidence of mispricing. What is interesting about the euro, however, is that the biggest buy signal was generated in 2015, and since then the fair value has exhibited a series of higher-lows and higher-highs. In short, it appears the euro has been in a low-conviction bull market since 2015. The Treasury-bund spread is the widest it has been in decades, and it is fair to say that some measure of mean reversion is due. The standard dilemma for the euro zone is that interest rates have always been too low for the most productive nation, Germany, but too expensive for others such as Spain and Italy. As such, the euro has typically been caught in a tug-of-war between a rising equilibrium rate of interest for Germany, but a very low neutral rate for the peripheral countries. The silver lining is that the European Central Bank has now finally lowered domestic interest rates and eased policy to the point where they are accommodative for almost all euro zone countries. The drop in the euro since 2018 has also eased financial conditions and made euro zone companies more competitive. This is a tailwind for European stocks. Fortunately for investors, European equities, especially those in the periphery, remain unloved, given they are trading at some of the cheapest cyclically adjusted price-to-earnings multiples in the developed world. Earlier this year, analysts began aggressively revising up their earnings estimates for euro zone equities relative to the U.S. If they are right, this could lead to powerful inflows into the euro over the next nine to 12 months.  The Japanese Yen Chart 6Rate Differentials Have Helped The Yen Rate Differentials Have Helped The Yen Rate Differentials Have Helped The Yen Chart 7JPY Is Slightly Expensive JPY Is Slightly Expensive JPY Is Slightly Expensive The yen’s fair value has benefitted tremendously from the plunge in global bond yields, which made rock-bottom Japanese rates relatively attractive from a momentum standpoint. That said, relatively subdued risk aversion has constrained upside in the fair value. The message from our ITTM is a moderate sell on the yen, which stands in contrast to our tactically short USD/JPY position. With the BoJ owning 46% of outstanding JGBs, about 75% of ETFs and almost 5% of JREITs, the supply side obviously puts a serious limitation on how much more stimulus the central bank can provide. Total annual asset purchases by the Bank of Japan are currently running at under ¥30 trillion, while JGB purchases are running at ¥20 trillion. This is a far cry from the central bank’s soft target of ¥80 trillion, and unlikely to change anytime soon, given 10-year government bond yields are six points away from the 20 basis-point floor. It looks like the end of the Heisei era has brought forward a well-known quandary for the central bank, which is that additional monetary policy options are hard to come by, since there have been diminishing economic returns to additional stimulus. This puts short USD/JPY bets in an enviable “heads I win, tails I do not lose too much” position.  The British Pound Chart 8Cable Is At Equilibrium Cable Is At Equilibrium Cable Is At Equilibrium Chart 9Political Risk Could Lead To An Undershoot Political Risk Could Lead To An Undershoot Political Risk Could Lead To An Undershoot The selloff in the pound since 2015 has been quick and violent, and triggered our stop loss at 1.25 this week. Interestingly, our ITTM does not show any mispricing in the pound’s fair value at the moment, suggesting momentum could shift either way rather quickly. For longer-term investors, there is fundamental support for holding the pound. For one, the pound is below where it was after the 2016 referendum results, yet more people are now in favor of staying in the union. Yes, incoming data in the U.K. has softened, but employment growth has been holding up very well, wages are inflecting higher and the average U.K. consumer appears in decent shape. This suggests that gilt yields should be higher than current levels, solely on the basis of domestic fundamentals. Our bulletin last week3 provided an ERM roadmap for the pound, and the conclusion is that we could be quite close to a floor. That said, valuation confirmation from our ITTM would have been a nice catalyst, which is not currently the case. As such, we are standing aside on the pound for now. The Canadian Dollar Chart 10Loonie Is Trading At A Discount Loonie Is Trading At A Discount Loonie Is Trading At A Discount Chart 11A Rise In Crude Oil Will Be Bullish A Rise In Crude Oil Will Be Bullish A Rise In Crude Oil Will Be Bullish USD/CAD is slightly overvalued from a fundamental perspective, but our ITTM is squarely sitting close to neutral. Going forward, movements in the Canadian dollar will be largely dictated by interest rate differentials and crude oil prices, which for now remain supportive. Canadian data has been firing on all cylinders of late, so it was no surprise that Bank of Canada Governor Stephen Poloz decided to keep interest rates on hold this week. Risks from the slowdown in global trade remain elevated, but easier monetary policy around the world should help. Developments in the oil patch should also be increasingly favorable as mandatory production curtailments in Alberta are eased. Notably, Canadian exports to the U.S. are near record highs. Housing developments have been uneven, with Halifax, Montreal and Ottawa seeing robust housing markets versus softer data elsewhere. That said, solid gains in labor income should sustain housing investment and growth. As for the loonie, the tailwinds remain favorable because 1) the Fed is expected to be more dovish over the next 12 months, which should tilt interest rate differentials in favor of the loonie, and 2) crude oil prices should remain well anchored in the near term on the back of geopolitical tensions, which will favor the loonie. The caveat is of course that global (and Canadian) growth bounces back by 2020 into 2021 as the BoC expects. The Swiss Franc Chart 12The Franc Value Is Fair The Franc Value Is Fair The Franc Value Is Fair Chart 13The Franc Has Been A Dormant Currency The Franc Has Been A Dormant Currency The Franc Has Been A Dormant Currency For most of the past decade, the Swiss franc has tended to be a dormant currency, interspersed by short bouts of intense volatility. That is reflected in the ITTM, which has not deviated much from zero over this time. The current message is that USD/CHF is slightly undervalued, a deviation that remains within the margin of error. A unifying theme for the franc is that it has tended to stage big moves near market riot points. That makes it attractive as a portfolio hedge, given no major evidence of mispricing today. With Swiss bond yields at already low levels, any downward pressure on global rates will boost the franc’s fair value. Meanwhile, Swiss prices are rising at a 0.6% annual rate, while U.S. prices are rising at a 1.6% clip, suggesting the franc is getting incrementally cheaper relative to its fair value. The message from Swiss National Bank Chair Thomas Jordan has been very clear: Interest rates could be lowered further, along with powerful intervention in the foreign exchange market, if necessary. This suggests that in the near term, the preference for the SNB is for a stable exchange rate. The issue is that market forces have occasionally dictated otherwise, especially during riot points. With the S&P 500 at record highs and corporate spreads both in the U.S. and euro area historically low, we may be approaching such a riot point soon, which will support the franc.  The Australian Dollar Chart 14AUD Trading Tightly With Fundamentals AUD Trading Tightly With Fundamentals AUD Trading Tightly With Fundamentals Chart 15No Major Mispricing In AUD No Major Mispricing In AUD No Major Mispricing In AUD Our ITTM for the Australian dollar sits notoriously close to fair value at most times, making opportunistic buys or sells in the Aussie rather difficult. The current message is that the AUD/USD is sitting squarely at fair value, meaning a move in either direction is fair game.  On the surface, most data points appear negative for the Aussie dollar. Typical reflation indicators such as commodity prices and industrial share prices are soft after a nascent upturn earlier this year. This suggests that so far, policy stimulus in China has not been sufficient to lift global growth, and/or the transmission mechanism towards higher growth is not working. That said, the latest Reserve Bank of Australia interest rate cut might be the ultimate insurance backstop needed to jumpstart the Australian economy. More importantly, fiscal policy is set to become decisively loose this year. The new government introduced income tax cuts this month. This is skewed towards lower-income households, meaning the fiscal multiplier may be larger than what the Australian economy is normally accustomed to. Infrastructure spending will also remain high, which will be very stimulative for growth in the short term. One bright spot for the Aussie dollar has been rising terms of trade. In recent months, both steel and iron ore prices have been soaring. Many commentators have attributed these increases to supply bottlenecks and/or seasonal demand. However, it is evident from both Chinese manufacturing data and the trend in prices that demand is also playing a role. We remain long AUD/USD with a tight stop at 68 cents.  The New Zealand Dollar Chart 16NZD Fair Value Has Been##br## Falling NZD Fair Value Has Been Falling NZD Fair Value Has Been Falling Chart 17NZD Cross Reflects Deteriorating Fundamentals NZD Cross Reflects Deteriorating Fundamentals NZD Cross Reflects Deteriorating Fundamentals Like the AUD, our ITTM for the NZD is sitting squarely at fair value. That said, we believe fundamentals are likely to shift against the NZD in the near-term. This warrants holding long AUD/NZD and SEK/NZD positions. Our bias is that failure to cut interest rates at the last policy meeting might have been a mistake by the Reserve Bank of New Zealand – one that will be reversed with more interest rate cuts down the line. Since 2015, the market has been significantly more dovish on Australia relative to New Zealand, in part due to a more accelerated downturn in house prices and a significant slowdown in China. The reality is that the downturn in Australia has allowed some cleansing of sorts, and brought it far along the adjustment path relative to New Zealand. We may now be entering a window where economic data in New Zealand converges to the downside relative to Australia, the catalyst being a foreign ban on domestic home purchases. The Norwegian Krone Chart 18NOK Is Cheap NOK Is Cheap NOK Is Cheap Chart 19A Rise In Crude Oil Will Be Bullish A Rise In Crude Oil Will Be Bullish A Rise In Crude Oil Will Be Bullish Our fundamental model for the Norwegian krone shows it as squarely undervalued. This favors long NOK positions, which we have implemented via multiple crosses in our bulletins. The Norges Bank is the most hawkish G10 central bank, which means interest rate differentials are likely to continue moving in favor of the krone. And with oil prices slated to rise towards year-end, this will also underpin NOK valuations. The Norwegian economy remains closely tied to oil, with the bottom in oil prices in 2016 having jumpstarted employment growth, business confidence and wage growth. With inflation near the central bank’s target and our expectation for oil prices to grind higher, we agree with the central bank’s assessment that the future path of interest rates is likely higher. Near $20/bbl, the discount between Western Canadian Select crude oil and Brent has narrowed, but remains wide. This has typically pinned the CAD/NOK lower. The NOK also tends to outperform the SEK when oil prices are rising, in addition to the benefit from a positive carry. The Swedish Krona Chart 20SEK Is Cheap SEK Is Cheap SEK Is Cheap Chart 21A Bounce In Global Growth Will Be Bullish A Bounce In Global Growth Will Be Bullish A Bounce In Global Growth Will Be Bullish Both our ITTM and FITM for the Swedish krona show the cross as cheap. Our high-conviction view is that the Swedish krona will be the biggest beneficiary from a rebound in global growth. For now, we are long SEK/NZD but are looking to add on to SEK positions once more evidence emerges that global growth has bottomed. The USD/SEK and NZD/SEK crosses tend to be highly correlated, since the SEK has a higher beta to global growth than the kiwi (Sweden exports 45% of its GDP versus 27% in New Zealand). On a relative basis, the Swedish economy appears to have bottomed relative to that of the U.S., making the SEK/NZD an attractive way to play USD downside. Meanwhile, the carry cost of being short NZD is lower compared to being short the U.S. dollar.    Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Special Report, titled "Tug Of War, With Gold As Umpire", dated March 29, 2019, available at fes.bcaresearch.com 2 Please see Foreign Exchange Strategy / Global Asset Allocation Strategy Special Report titled, "Currency Hedging: Dynamic Or Static? – A Practical Guide For Global Equity Investors (Part II)", dated October 13, 2017, available at fes.bcaresearch.com and gaa.bcaresearch.com 3 Please see Foreign Exchange Strategy Weekly Report, titled "Portfolio Tweaks Into Thin Summer Trading", dated July 5, 2019, available at fes.bcaresearch.com Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades

Highlights It remains too early to put on fresh pro-cyclical trades, but the Federal Reserve’s dovish shift is a positive development at the margin. As the market fights a tug of war between weak fundamentals and easier monetary policy, bigger gains are likely to be made at the crosses rather than versus the dollar. Safe-haven currencies are also winners in the interim. Continue to hold short USD/JPY positions recommended last week. Watch the gold-to-bond ratio for cues on where the balance of forces are shifting, with a rising ratio negative for the dollar. Once investors eventually shift their focus towards the rising U.S. twin deficits, de-dollarization of the global economy and low expected returns for U.S. assets, the dollar will peak. New idea: Buy SEK/NZD for a trade. Feature Global markets have once again decided that the U.S. is due for rate cuts, and the Federal Reserve appears to be heeding their message. Both Fed Governor Lael Brainard and Fed Chair Jerome Powell have suggested that policy should be calibrated to address the downside risks posed by the trade war.   The question du jour is the path of the dollar if the Fed eventually does ease monetary policy. A slowing global economy on the back of deteriorating trade is positive for the greenback, since it is a counter-cyclical currency. A Fed rate cut will just be acknowledging the gravity of the slowdown. On the other hand, a dovish Fed knocks down U.S. interest rate expectations relative to the rest of the world. This has historically been bearish for the dollar, and positive for global growth. Our bias remains that the dollar will emerge a loser in this tug of war, especially if Beijing and Washington come to a trade agreement. However, for currency strategy, it is important to revisit our indicators to see where the balance of forces for the dollar lie. We do this via the lens of interest rate differentials, global growth, liquidity trends, and positioning. Expectations Versus Reality Markets are mostly wrong about Fed interest rate expectations, but do get it right from time to time. Since the 1990s, most Fed rate-cutting cycles were initially predicted in advance by the swaps market. Moreover, the current divergence between market expectations and policy action is as wide as before the Great Recession, and among the deepest in over three decades (Chart I-1). The fact that the Fed seldom cuts interest rates only once during a mid-cycle slowdown suggests expectations could diverge even further. Outside of recessions, falling rate expectations relative to policy action have historically been bearish for the dollar, and vice versa. This makes intuitive sense. As a reserve and counter-cyclical currency, the dollar has tended to rise during times of capital flight. However, if we are not on the cusp of a recession, then easier monetary policy by the Fed should improve global liquidity, which is bullish for higher-beta currencies and negative for the dollar. On this front, our discounter suggests rate cuts of about 80 basis points are penciled in by the swaps market over the next 12 months. This will put downward pressure on the dollar. It also helps that sentiment on the greenback remains relatively bullish, and speculators are very long the currency (Chart I-2). Chart I-1Big Divergences Are Rare Will The Market Be Wrong This Time? Will The Market Be Wrong This Time? Chart I-2Lots of Room For The Dollar To Fall Lots of Room For The Dollar To Fall Lots of Room For The Dollar To Fall     Chart I-3Relative Rates Moving Against The Dollar Relative Rates Moving Against The Dollar Relative Rates Moving Against The Dollar Relative interest rate differentials between the U.S. and the rest of the world continue to suggest that the greenback should be slightly higher. However, the Treasury market tends to be a global interest rate benchmark rather than specific to the U.S. With global growth in a downtrend and the Fed becoming relatively more dovish, U.S. interest rates are falling much faster than elsewhere and closing the interest-rate gap vis-à-vis the rest of the world. A peak in U.S. interest rates relative to its G10 peers has always been a bad omen for the greenback (Chart I-3). Market action following the Reserve Bank of Australia’s (RBA) interest rate cut this week is a case in point. The initial reaction was a knee-jerk rally in AUD/USD. Australian 10-year government bond yields are already 65 basis points below U.S. levels, the lowest since the 1980s. But the structural growth rate in Australia remains higher than in the U.S., suggesting there is a natural limit as to how low relative interest rates can go. We remain long AUD/USD, but are maintaining a tight stop at 68 cents should rising volatility nudge the market against us.1 Australian 10-year government bond yields are already 65 basis points below U.S. levels, the lowest since the 1980s. Bottom Line: Interest rate expectations between the rest of the world and the U.S. are already at very depressed levels. This suggests that unless the world economy tips into recession, rate differentials are likely to shift against the greenback. A dovish Fed could be the catalyst that triggers this convergence. Portfolio Flows The change in the U.S. tax code to allow for the repatriation of offshore cash helped the dollar in 2018, but not to the extent that might have been expected. On a rolling 12-month basis, the U.S. has repatriated about $400 billion in net assets, or close to 2% of GDP. Historically, this is a very huge sum that would have had the potential to set the greenback on fire – circa 10% higher. The issue today is that the tax break was a one-off, and net flows into the U.S. are now rolling over as the impact fades (Chart I-4). Historically, portfolio flows into the U.S. have been persistent, so it will be important to monitor how fast repatriation flows run off. The Fed’s tapering of asset purchases has been a net drain on dollar liquidity. In the meantime, foreign investors have been fleeing U.S. capital markets at one of the fastest paces in years. On a rolling 12-month total basis, the U.S. is seeing an exodus of about US$200 billion in equity from foreigners, the largest on record (Chart I-5). In aggregate, both foreign official and private long-term portfolio investment into the U.S. has been rolling over, with investor interest limited only to agency and corporate bonds. Foreigners are still net buyers of U.S. securities, but the downtrend in purchases in recent years is evident. Chart I-4Repatriation Flows Have Peaked Repatriation Flows Have Peaked Repatriation Flows Have Peaked Chart I-5Investors Stampeding Out Of U.S. Equities Investors Stampeding Out Of U.S. Equities Investors Stampeding Out Of U.S. Equities The one pillar of support for the dollar is falling liquidity (Chart I-6). Internationally, the Fed’s tapering of asset purchases has been a net drain on dollar liquidity, despite a widening U.S. current account deficit. The Fed’s balance sheet peaked a nudge above US$4.5 trillion in early 2015 and has been falling since. This has triggered a severe contraction in the U.S. monetary base, and has severely curtailed commercial banks’ excess reserves. However, with the Fed turning more dovish and its balance sheet runoff slated to end in September, dollar liquidity will likely improve at the margin. Chart I-6A Dollar Liquidity Squeeze A Dollar Liquidity Squeeze A Dollar Liquidity Squeeze Bottom Line: Currency markets continue to fight a tug of war between deteriorating global growth and easier monetary conditions. Our bias is that the dollar will emerge a loser. Falling interest rate differentials, portfolio outflows, soft relative growth and easing liquidity strains support this thesis. Another Dovish Shift By The ECB The European Central Bank (ECB) kept monetary policy unchanged following this week’s meeting, while highlighting that it will be on hold for longer – at least until mid-2020. The EUR/USD rallied on the news, suggesting the market expected a much more dovish ECB. Our bias is that with European long-term rates already at rock-bottom levels relative to the U.S., the currency market will continue to be disappointed by ECB policy actions for now. Economic surprises are rising in Sweden relative to New Zealand.    Terms for the new Targeted Longer-Term Refinancing Operation (TLTRO III – in other words, cheap loans), were announced at 10 basis points above the main refinancing rate. They can fall as low as 10 basis points above the deposit rate if banks meet certain lending standards. There was no mention of a tiered system for its marginal deposit facility, which would have alleviated some cash flow pressures for euro area banks. We remain of the view that TLTROs are a better policy tool than a tiered central bank deposit system. Chart I-7A Tentative Bottom In Euro Area Data A Tentative Bottom In Euro Area Data A Tentative Bottom In Euro Area Data In the case of a TLTRO, the ECB can effortlessly decentralize monetary policy, since liquidity gravitates towards the countries that need it the most. While a tiered system can allow a bank to offer higher rates and attract deposits, there is no guarantee that these deposits will find their way into new loans. It is also likely to benefit countries with the most excess liquidity. The euro’s bounce suggests that the ECB’s dovish shift is paradoxically bullish for the euro. If a central bank eases financing conditions at a time when growth is hitting a nadir, it is tough to argue that it is bearish for the currency. Meanwhile, fiscal policy is also set to be loosened. Swedish new orders-to-inventories lead euro area growth by about five months, and the recent uptick could be a harbinger of positive euro area data surprises ahead (Chart I-7). Bottom Line: European rates are further below equilibrium compared to the U.S., and the ECB’s dovish shift will help lift the euro area’s growth potential. Meanwhile, investors are currently too pessimistic on euro area growth prospects. Our bias is that the euro is close to a floor. Buy SEK/NZD For A Trade A few market indicators suggest there is a trading opportunity for the SEK/NZD cross: Since 2015, the cross has been trading into the apex of a tight wedge formation, defined by higher lows and lower highs. From a technical standpoint, the break above the 50-day moving average is bullish, suggesting the cross could gap higher outside its tight wedge (Chart I-8). Economic surprises are rising in Sweden relative to New Zealand. Going forward, this trend is likely to persist given that investor expectations toward the Swedish economy are very bearish (on the back of depressed sentiment towards the euro area). Relative economic surprises have a good track record of capturing short-term swings in the currency (Chart I-9). Chart I-8A Breakout Seems##br## Imminent A Breakout Seems Imminent A Breakout Seems Imminent Chart I-9Sweden Could Perform Better Than New Zealand Sweden Could Perform Better Than New Zealand Sweden Could Perform Better Than New Zealand Interest rates are moving in favor of the SEK/NZD cross. For almost two decades, relative interest rate differentials between Sweden and New Zealand have been a powerful driver of the exchange rate (Chart I-10). The housing downturn appears well advanced in Sweden relative to New Zealand. Rising relative house prices have historically been supportive of the cross (Chart I-11). The undervaluation of the krona has begun to mitigate the effects of negative interest rates, mainly a buildup of household leverage and an exodus of foreign direct investment. Chart I-10Relative Rates Favor SEK/NZD Relative Rates Favor SEK/NZD Relative Rates Favor SEK/NZD Chart I-11Swedish House Prices Could Stabilize Swedish House Prices Could Stabilize Swedish House Prices Could Stabilize The USD/SEK and NZD/SEK cross tend to be highly correlated, since the SEK has a higher beta to global growth than the kiwi (Sweden exports 45% of its GDP versus 27% in New Zealand). On a relative basis, the Swedish economy appears to have bottomed relative to that of the U.S., making the SEK/NZD an attractive way to play USD downside. Meanwhile, the carry cost of being short NZD is lower compared to being short the U.S. dollar. Housekeeping We recommended a short USD/JPY position last week, which is currently 1.3% in the money. Our conviction remains high that this could be the best performing trade over the next one-to-three months. For one, the cross has “underperformed” its safe-haven status. The AUD/JPY is back to its 2016 lows, suggesting the market is flirting with another riot point, but the USD/JPY is still well above 100. We expect the latter to eventually give way as currency volatility rises (Chart I-12). Chart i-12Hold Short USD/JPY Positions Hold Short USD/JPY Positions Hold Short USD/JPY Positions   Chester Ntonifor, Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Weekly Report, titled “A Contrarian View On The Australian Dollar,” dated May 24, 2019, available at fes.bcaresearch.com. Currencies U.S. Dollar Chart II-1USD Technicals 1 USD Technicals 1 USD Technicals 1 Chart II-2USD Technicals 2 USD Technicals 2 USD Technicals 2 Recent data in the U.S. have been negative: Headline and core PCE were both unchanged at 1.5% and 1.6% year-on-year, respectively. Personal income increased by 0.5% month-on-month in April. However, personal spending increased by only 0.3% month-on-month, lower than expected. Michigan consumer sentiment index fell to 100 in May. Markit composite PMI fell to 50.9 in May, with manufacturing and services PMIs both falling to 50.5 and 50.9, respectively. ISM manufacturing PMI fell to 52.1 in May, while non-manufacturing PMI increased to 56.9. MBA mortgage applications increased by 1.5% in May. The trade deficit fell from $51.9 billion to $50.8 billion in April. On the labor market front, initial and continuing jobless claims rose to 218 thousand and 1.682 million, respectively DXY index fell by 0.8% this week. Chairman Powell gave the opening remarks at the FedListens conference organized by the Chicago Fed this Tuesday, during which he stated that the Fed is closely monitoring trade developments, and will act to sustain the expansion. This signals the potential for rate cuts in the coming monetary policy meetings. Report Links: President Trump And The Dollar - May 9, 2019 Take Out Some Insurance - May 3, 2019 Currency Complacency Amid A Global Dovish Shift - April 26, 2019 The Euro Chart II-3EUR Technicals 1 EUR Technicals 1 EUR Technicals 1 Chart II-4EUR Technicals 2 EUR Technicals 2 EUR Technicals 2 Recent data in the euro area have been negative with inflation well below target: Markit manufacturing PMI in the euro area fell to 47.7 in May, as expected. Markit services and composite PMI increased to 52.9 and 51.8 respectively in May. Unemployment rate fell to 7.6% in April. Preliminary headline and core CPI both fell to 1.2% and 0.8% year-on-year respectively in May, dropping to the lowest levels in more than one year. Producer price inflation fell to 2.6% year-on-year in April. Retail sales growth fell to 1.5% year-on-year in April. Employment growth was unchanged at 1.3% year-on-year in Q1. EUR/USD increased by 0.8% this week. On Thursday, the ECB decided to leave interest rates unchanged. The Governing Council also expects the key rates to remain at current levels at least through the first half of 2020. Report Links: Take Out Some Insurance - May 3, 2019 Reading The Tea Leaves From China - April 12, 2019 Into A Transition Phase - March 8, 2019 Japanese Yen Chart II-5JPY Technicals 1 JPY Technicals 1 JPY Technicals 1 Chart II-6JPY Technicals 2 JPY Technicals 2 JPY Technicals 2 Recent data in Japan have been negative: Housing starts fell by 5.7% year-on-year in April. Construction orders fell by 19.9% year-on-year in April. Consumer confidence fell to 39.4 in May. Nikkei manufacturing PMI increased to 49.8 in May, while Markit services PMI fell to 51.7 in May. Capital spending was positive in Q1, rising 6.1% year-on-year versus expectations of 2.6%. USD/JPY fell by 0.6% this week. Our “Heads I Win, Tails I Don’t Lose Too Much” bet on a short USD/JPY position is currently 1.3% in the money since entered last Friday.                                                                                        Report Links: Short USD/JPY: Heads I Win, Tails I Don’t Lose Too Much - May 31, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Tug OF War, With Gold As Umpire - March 29, 2019 British Pound Chart II-7GBP Technicals 1 GBP Technicals 1 GBP Technicals 1 Chart II-8GBP Technicals 2 GBP Technicals 2 GBP Technicals 2 Recent data in the U.K. have been mixed: Nationwide house prices grew by only 0.6% year-on-year in April. Mortgage approvals increased to 66.3 thousand in April. Money supply (M4) increased by 3% year-on-year in April. Markit manufacturing PMI fell to 49.4 in May, the lowest since 2016. Construction PMI also fell to 48.6, while services PMI increased to 51. GBP/USD increased by 0.5% this week. During Trump’s visit to U.K. this week, he said that U.S. companies should have market access to every sector of the British economy as part of any deal. The pound is likely to trade higher until political uncertainty is reintroduced in July, ahead of elections for a new Conservative leader. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Take Out Some Insurance - May 3, 2019 Not Out Of The Woods Yet - April 5, 2019 Australian Dollar Chart II-9AUD Technicals 1 AUD Technicals 1 AUD Technicals 1 Chart II-10AUD Technicals 2 AUD Technicals 2 AUD Technicals 2 Recent data in Australia have been mixed: Private sector credit increased by 3.7% year-on-year in April, slightly lower than expected. AiG performance of manufacturing index fell to 52.7 in May, while the services index increased to 52.5. The current account deficit narrowed to from A$6.3 billion to A$2.9 billion in Q1. Retail sales contracted by 0.1% month-on-month in April. GDP came in at 1.8% year-on-year in Q1, in line with expectations. Trade surplus fell to A$4.9 million in April. AUD/USD increased by 0.76% this week. The RBA cut interest rates by 25 bps to a record low of 1.25% on Tuesday, the first move since August 2016. Governor Philip Lowe emphasized that this decision is not due to deterioration in the Australian economy. Moreover, he believes that while the cut might reduce interest income for many, the effects will be fully passed to mortgage rates, thus lowering payments and boosting disposable income. Report Links: A Contrarian View On The Australian Dollar - May 24, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Not Out Of The Woods Yet - April 5, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 NZD Technicals 1 NZD Technicals 1 Chart II-12NZD Technicals 2 NZD Technicals 2 NZD Technicals 2 Recent data in New Zealand have been mostly negative: Consumer confidence fell to 119.3 in May. Terms of trade increased by 1% in Q1. ANZ commodity price was unchanged in May. NZD/USD increased by 1.4% this week. The New Zealand dollar is benefitting from rising soft commodity prices, on the back of a poor U.S. planting season. However, we believe terms of trade over the longer term will be more favorable for Australia, compared to New Zealand. Hold strategic long AUD/NZD positions. Report Links: Not Out Of The Woods Yet - April 5, 2019 Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Canadian Dollar Chart II-13CAD Technicals 1 CAD Technicals 1 CAD Technicals 1 Chart II-14CAD Technicals 2 CAD Technicals 2 CAD Technicals 2 Recent data in Canada have been mostly positive: Industrial product prices increased by 0.8% month-on-month in April. GDP growth increased by 1.4% year-on-year in Q1, above expectations.  Markit manufacturing PMI fell to 49.1 in May. Labor productivity increased by 0.3% quarter-on-quarter in Q1. The trade deficit narrowed to C$0.97 billion in April. Exports increased to C$50.7 billion, while imports fell to C$51.7 billion. USD/CAD fell by 1% this week. The latest downdraft in oil prices is likely to have a negative impact on the loonie. We remain short CAD/NOK as a play on better pricing for North Sea crude, versus WTI. Norway will also benefit more from a pickup in European growth.  Report Links: Currency Complacency Amid A Global Dovish Shift - April 26, 2019 A Shifting Landscape For Petrocurrencies - March 22, 2019 Into A Transition Phase - March 8, 2019 Swiss Franc Chart II-15CHF Technicals 1 CHF Technicals 1 CHF Technicals 1 Chart II-16CHF Technicals 2 CHF Technicals 2 CHF Technicals 2 Recent data in Switzerland have been neutral: Real retail sales fell by 0.7% year-on-year in April, versus the consensus of -0.8%. Headline inflation fell from 0.7% to 0.6% year-on-year in May. Manufacturing PMI increased to 48.6 in May. USD/CHF fell by 1.1% this week. The franc will benefit from rising volatility as penned in our Special Report three weeks ago. Moreover, the franc is still cheap relative to its fair value. Report Links: What To Do About The Swiss Franc? - May 17, 2019 Beware Of Diminishing Marginal Returns - April 19, 2019 Balance Of Payments Across The G10 - February 15, 2019 Norwegian Krone Chart II-17NOK Technicals 1 NOK Technicals 1 NOK Technicals 1 Chart II-18NOK Technicals 2 NOK Technicals 2 NOK Technicals 2 There was little data out of Norway this week: Manufacturing PMI came in at 54.4 in May, from 54 in April. Current account surplus increased from NOK 47.3 billion to NOK 67.8 billion in Q1. USD/NOK fell by 0.6% this week. Our Commodity & Energy team continue to favor oil prices, but have revised down their forecasts from $77/bbl to $73/bbl for Brent this year and next. Despite the recent plunge in crude oil prices, rising inventories in the U.S. allow for OPEC production cuts, which will eventually be bullish. Report Links: Currency Complacency Amid A Global Dovish Shift - April 26, 2019 A Shifting Landscape For Petrocurrencies - March 22, 2019 Balance Of Payments Across The G10 - February 15, 2019 Swedish Krona Chart II-19SEK Technicals 1 SEK Technicals 1 SEK Technicals 1 Chart II-20SEK Technicals 2 SEK Technicals 2 SEK Technicals 2 Recent data in Sweden have been positive: Manufacturing PMI jumped to 53.1 in May, versus 50.9 in the previous month. Retail sales grew by 3.9% year-on-year in April. Industrial production increased by 3.3% year-on-year in April. Manufacturing new orders rose by 0.1% year-on-year in April.  Lastly, the current account surplus increased to SEK 63 billion in Q1.  USD/SEK fell by 0.6% this week. We like the Swedish krona as a potential reflation play and are going long SEK/NZD this week for a trade. Report Links: Balance Of Payments Across The G10 - February 15, 2019 A Simple Attractiveness Ranking For Currencies - February 8, 2019 Global Liquidity Trends Support The Dollar, But... - January 25, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades