The Morning Macro Call

Whilst the first Presidential TV debate between Trump and Biden this week may put the US election event risk at the forefront of the thinking for investors — we note a high bar for US political uncertainty to weigh on the dollar given how stretched short USD positioning is at present. Given how polls put Biden firmly in the lead, the risk is that the run-in to the Nov 3rd US elections sees a positive repricing of Trump re-election odds. A positive repricing of Trump re-election prospects would be USD supportive (and high-beta FX negative through the channel of weaker CNY) — meaning investors may find limited reasons to add to bearish USD positions ahead of the Nov elections.

Guest speaker Andreas Steno Larsen (Nordea) shares his views on where next for EUR/USD, why the Fed's new inflation-targeting policy is actually creating a bit of uncertainty and also why the ECB talking about APP flexibility is actually a dovish signal for markets. We also touch a bit on EM markets after two EM central banks (Hungary & Turkey) made defensive rate hikes yesterday.

We're joined by guest speaker Michael Brown from Caxton FX to discuss where global markets go given the narrative vacuum right now and a lack of positive catalysts for investors to anchor their risk bets on. We also take a closer look at the potential policy responses that could save markets - including Chancellor Rishi Sunak's new UK jobs scheme to be announced later today.

Whilst the US election run-in has been rocked by the passing of Ruth Bader Ginsburg – the more pressing concern for markets this week should be the US Commerce Dept's ruling on whether the Chinese yuan is deemed to be unfairly undervalued (report due today). We think Beijing has been visibly moving USD/CNY lower recently to avoid any FX scrutiny from the Trump admin. Also, G10 central banks will dominate the week ahead – with Fed talk and a host of policy decisions (RBNZ, Riksbank, SNB, Norges) to look forward to.

The latest round of meetings has shown how G10 & EM central banks are now clearly taking different policy routes during the post-COVID recovery phase – with local factors and local market conditions driving policy choices. We have more meetings next week (RBNZ, SNB, Norges Bank & Riksbank) – any divergence in interest rate paths will have an impact on the local currency.

In the absence of any Fed dovish surprises at the Sep FOMC meeting - we think there'll be little for cross-markets to cling onto in terms of directional steer from the US central bank. In this call, we highlight four things to watch out for at the Sep FOMC meeting - including where US policymakers see the terminal Fed funds rate in the post-COVID economic cycle (currently around 2.5%).

Whilst the ECB's inflation credibility problem remains an issue given where EUR is trading, the BoE has its own inflation issue to tackle now due to the threat that a No Deal Brexit & a sharp GBP fall poses. UK breakevens are moving higher (and not in a good way). It's for this reason that we don't think the BoE, nor the ECB, would allow a world in which EUR/GBP trades at parity.

We cover 4 possible scenarios for this week's ECB meeting (Thu) – where we think the baseline expectations are for a dovish ECB tilt (Scenario 2). But sluggish EZ data of late and a decline in market-based inflation expectations means that we are not ruling out surprise stimulus as early as this week (Scenario 3). EUR spec long positions that were built up over summer look vulnerable to any ECB jawboning

First Friday of the month – which means one thing: US nonfarm payrolls day. 'Consensus' is looking for +1350k jobs added (though the range of expectations is -100k to +2400k). It's anyone's guess. What's surprising is no POTUS jobs tweet ahead of this report (is this telling of what to expect today...). US Labor Day holiday on Mon may see some position squaring ahead.

Short-term interest rate expectations in the UK have fallen by more than their equivalent in any other developed market since May 2020. The relative pessimism expressed in the UK rates market may be unjustified when assessing the potential reasons for why this may be occurring. We discuss these in today's podcast and the cross-market implications of a possible mispricing of UK interest rate expectations.