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Today's key points

• Central bankers look increasingly divided into those in the 'exit' camp (Fed, BoE, ECB), those in the 'no exit camp' (BoJ, SNB), and those in between (Riksbank, Norges Bank)
• While the Fed looks determined to hike in December, it is unlikely to drive a major sell-off in EUR/USD

In a week which saw risk sentiment improving again following set-backs ahead of hurricane Irma and the imposition of harsher sanctions against North Korea, we also saw the Bank of England (BoE) signal a hiking cycle to begin sooner than we and the market were looking for, and the Swiss National Bank (SNB) emphasising its commitment to accommodative policy. In our view, this served to confirm that central bankers are now divided into largely three camps.

In the 'exit' camp we have the central banks looking to 'normalise' policy after years of using unconventional measures. A prominent member of this camp is the Fed, which has in fact been in tightening mode since the tapering discussion began back in 2013. But, this week's BoE meeting also clearly cemented that the BoE is keen to start a hiking cycle, see Bank of England review: November hike is now a close call. And then importantly, in our view, there is the ECB, which has somewhat started talking about 'reflationary' (rather than deflationary) risks – a wording once again used by ECB chief economist Praet in a speech reiterating the hawkish tone from last week's meeting.

In the 'no exit' camp, we have the central banks keen to avoid joining the 'normalisation' discussions taking place elsewhere, not least as they worry this could bring about unwanted currency strength. The Bank of Japan (BoJ) has clearly placed itself in this camp following the introduction of yield curve control and will likely stay in easing mode for an extended period as price pressure remains weak, see Research Japan: Running on all engines. This week's SNB meeting also confirmed that the Swiss are 'in it' (negative rates and a bloated balance sheet) for the long run as sustained price pressure is lacking still.

And then there is the group of those in-between, reluctant to side with either camp: arguably these would under 'normal' circumstances be looking to make policy less accommodative but are reluctant to do so as they are uncertain whether underlying inflationary pressure is strong enough to withstand currency strength along the way. This group in our view includes notably the Riksbank and Norges Bank, with the latter struggling with recent low inflation prints and the former insisting the latest inflation uptick is temporary; also both are wary of potentially wobbly housing markets.

Next up for revealing its preferences regarding policy is the Fed with the FOMC meeting next week, see FOMC preview, 15 September 2017. We expect the Fed to stay on hold but announce it will begin shrinking its balance sheet in October. The latter is widely expected and should not have a major impact on neither Treasury yields nor USD. But we also expect the median FOMC 'dots' to still signal one more hike this year and three hikes next year, which remain far from market expectations. This week saw a decent inflation print out of the US which, alongside slightly improved prospects of a corporate tax reform in the US, should keep the Fed on track for a December hike, in our view, even if it is an increasingly close call.

With central banks divided as indicated above, it is tempting to conclude that US yields should move higher and that USD strength could materialise near term. But not so fast: the short end of the US yield curve has struggled to move higher this year, which may be ascribed partly to fading Trump optimism, but which may more broadly be seen in the context of the sustained downward pressure on the natural rate of interest across a range of countries. The latter hints that the longer-term potential for yields to move higher may be limited, which in turn suggests that the potential for the Fed to hike and reduce its balance sheet simultaneously could be rather limited. This week we have seen a decent rebound in US and European bond yields, but we do not see this as the start of a continued sell-off in the bond market.

In the FX sphere, while USD/JPY remains in the hands of US Treasury yields which could be in for a muted rise in 2018, relative interest rates have largely failed to track movements in notably the sustained uptick in EUR/USD in the year so far. That said, a range of factors should cap EUR/USD upside near term on top of the possible, if limited, downside from a possible December Fed hike. Speculative positioning is closing in on stretched territory, suggesting risks are tilted to the downside for the cross. Unhedged equity flows seems to be fading and should thus provide less EUR support going forward. Also, our quantitative business-cycle models suggest the US economy is re-gaining momentum while the eurozone is now losing steam a bit.

But, as we highlighted in FX Edge: Power of flows - EUR/USD eyeing 1.30 longer term, the potential for a 'normalisation' in eurozone debt flows as the next leg of ECB exit pricing gains traction is a key source of upside risk for the single currency longer term. Crucially, the ECB seems increasingly willing to accept EUR appreciation these days as long as it happens gradually and is supported by a strong domestic economy. We look for EUR/USD to trade in a range around the 1.20 mark near term and reiterate our call that any dips in the cross will be shallow and short-lived. While we still look for a move towards the mid-1.20s further out we emphasise that the speed with which EUR/USD is set to move higher will be reduced going forward. Next to join the 'exit' camp could be the Riksbank, which we think will end its QE scheme this December. Relatively high inflation prints for the remainder of this year should serve as a cap on EUR/SEK, but significant SEK appreciation from here still requires a marked shift in policy stance from the Riksbank. We look for continued range-trading in EUR/SEK around 9.50 in the next few months.

• We expect the Bank of Japan (BoJ) to maintain its 'QQE with yield curve control' policy unchanged at its monetary policy meeting ending on 21 September.
• Political uncertainty is likely to increase in Japan where the focus will in particular centre on whether PM Abe calls for an early general election, and not least whether BoJ governor Koruda will be re-appointed to lead the BoJ for another five years when his current term ends in April 2018.
• In our main scenario, we expect the BoJ to keep its policy unchanged throughout our 12M forecast horizon, assuming that BoJ governor Koruda is re-appointed.
• We look for USD/JPY to remain range bound in the near term as political uncertainty (both in relation to North Korea and domestically in Japan) is likely to counter most of the JPY depreciation potential. Longer term, we expect USD/JPY to increase, targeting 114 in 3M and 116 in 6-12M.
• Tactically, we prefer to stay sidelined USD/JPY as highly unpredictable political risks leave a less attractive risk/reward. EUR- and DKK-based corporates should hedge JPY income with FX forwards.

We expect the Bank of Japan (BoJ) to maintain its 'QQE with yield curve control' policy unchanged at its monetary policy meeting ending on 21 September. It is widely expected that the BoJ will keep its monetary policy unchanged and that the announcement should not have any significant impact on price actions.

The Japanese economy is currently running on all engines, and GDP growth picked up speed in Q2 with at annualised growth of 2.5%. CPI inflation has also been increasing through 2017, but it has mainly been due to rising energy prices. Hence, the underlying price pressure in Japan remains very low, despite solid growth and a closed output gap, and the BoJ's 2% inflation target is currently nowhere within reach. See Research Japan: Running on all engines (12 September) for more details.

New board members less likely to oppose Kuroda's policy

The 20-21 September meeting will be the first meeting for the two new board members, Hitoshi Suzuki and Goshi Kataoka, who have been appointed by Japan's parliament to replace the two frequent dissenters on the board, Takahide Kiuchi and Takehiro Sato, as their five-year terms ended in July. Kataoka has an economic background and is viewed as a reflationist who is likely to support the BoJ's large-scale monetary easing, while Suzuki comes from a position in Tokyo-Mitsubishi UFJ's financial market operations, and both new members are less likely to oppose Koruda's policy. Hence, with the arrival of Kataoka and Suzuki the BoJ board will move in a more dovish direction and the nominations underscore that the Abe administration wants the BoJ to continue its current expansionary stimulus programme.

In terms of the BoJ, the focus will gradually turn to the question of who will be the next BoJ governor as Koruda's term as BoJ governor expires in April 2018. The decision about the next BoJ governor is expected by end-2017 and we still think it is most likely that Koruda will be reappointed. But uncertainty could create some volatility and induce JPY appreciation pressure, as the nomination of another candidate could be viewed as a signal that the government is expecting the BoJ to exit its current monetary policy

Rising political uncertainty the main risk to the BoJ's policy

The government's approval rating has recovered somewhat following a turbulent summer when a series of scandals involving PM Abe and his close political allies led to a plunge in the government's approval rating. The cabinet reshuffle in August has probably helped to improve his image, but political uncertainty is likely to remain high as the political calendar in Japan is packed with important events in the coming years.

During the autumn, the focus will be on the FY 2018 budget negotiations and not least the nomination of the next BoJ governor. Moreover, there has been some speculation whether PM Abe will dissolve the Lower House and call for an early general election in an attempt to strengthen his powerbase ahead of the LDP presidential election in September 2018 and the Upper House election in July 2019. As markets will probably link the fate of the Abe administration to the current accommodative policy regime (Abenomics), a potential change in leadership is likely to affect the expected outlook for fiscal and monetary policy.

FX outlook: higher USD/JPY and EUR/JPY in 6-12 months

While the combination of strong global PMIs and postponement of US debt limit risk is good for risk appetite and has improved the prospect of a higher USD/JPY in the near term, geopolitical uncertainty related to North Korea still represents a substantial downside risk and will continue to weigh on the cross. According to the latest IMM data, non-commercial JPY positioning is now back in stretched short territory, suggesting risks are tilted to the downside for USD/JPY from a positioning point of view. We still expect USD/JPY to trade within the 108-111 range near term targeting 111 in 1M and 114 in 3M. Fundamentally, we still see a case for a higher USD/JPY over the medium term horizon, driven by Fed-BoJ divergence, higher global yields (eventually) supported by global growth recovery and portfolio outflow out of Japan. We target USD/JPY at 116 in 6-12M.

EUR/JPY has proved to be less sensitive to negative risk sentiment driven by North Korean woes (declines in USD/JPY have been echoed by drops in EUR/USD). However, if the crisis escalates significantly, EUR/JPY would also take a plunge in our view. We look for EUR/JPY to trade in the range of 128-135 in the near term, targeting 135 in 3M. Longer term, we expect EUR/JPY to continue higher driven by real interest rates and portfolio outflows out of Japan as we expect the ECB to move towards monetary policy 'normalisation' before the BoJ. We target EUR/JPY at 141.50 in 6M and 145 in 12M.

FX strategy

Leveraged funds

While the underlying fundamentals combined with the postponement of the US debt limit risk support the case for a higher USD/JPY in the coming months, we prefer to stay sidelined USD/JPY for now. In our view, the combination of highly unpredictable political risks related to North Korea, and the risk of rising volatility and JPY appreciation pressure driven by domestic political uncertainty in Japan, leaves a less attractive risk/reward.

Corporates

We recommend EUR- and DKK-based corporates to hedge JPY income with FX forwards, while JPY expenses should be hedged via knock-in forwards.

Retail sales decreased 0.2% in August according to the advance Census Bureau report. This was well below expectations, which called for a rise of the same magnitude. Moreover, the previous month's surge in retail sales was cut in half, with the July gain now only reported as 0.3% m/m.

Sales at motor vehicle & parts dealers (-1.6%) subtracted from the headline - not surprising given the pullback in August auto sales to 16 million annualized. This decline was more than offset by the surge in gasoline stations spending , which rose by 2.5% on the month with the ex. autos and gas measure down 0.1% on the month.

Excluding gas, autos, building materials (-0.5%), and food services (+0.3%), the so-called 'control group' used in calculating GDP was down 0.2% on the month - below the 0.2% gain expected by economists. Gains in the control group were relatively broad, with miscellaneous (+1.4%), furniture (+0.4%), food & beverage (+0.3%) and general merchandise (+0.2%) seeing gains. Unusually, e-commerce sales were down 1.1%, alongside declines in clothing (-1.0%), electronics (-0.7%), and building materials (-0.5%).

Key Implications

Last month's advance report made us giddy with excitement at the prospect that American consumers were back in full force. And then came this morning's report, which effectively erased much of the outsized gains we believed occurred last month. Worse still, this morning's report also indicated that consumers were reluctant to spend in the month of August, despite the strong job and income figures as of late. Overall, the new information suggests that consumption in the third quarter was not as strong as otherwise thought, with real PCE growth likely to be near the 2.5% mark - down from the 3.2% during the second quarter.

Still, as far as the decline in retail sales during August, we believe that most is likely related to the disruption in economic activity in southeast Texas. While some retailers likely experienced pre-emptive buying ahead of landfall, others likely faced prolonged closures due to weather conditions and lack of inventory. The Census Bureau indicated that reports suggested that the "hurricane had both positive and negative effects" on sales while others indicated no impact at all. Moreover, some firms reported due to "permanent or temporary store closures and stores having reduced business due to damage, shipment delays, etc."

Ultimately, the decline in July makes sense given the disruption in economic activity related to the storm. We expect that both Harvey and Irma are likely to drag down GDP growth in the third quarter by about half a point (in annualized terms) with a boost of a similar magnitude during the fourth quarter. As such, expect further volatility in the data going forward. Having said that, we expect the Fed to largely see through the volatility given its transitory nature.

Good day traders! Let's start the US session with NZDUSD and GBPUSD.

NZDUSD is now finally turning up for wave c as part of double zig-zag correction. We see some sharp leg up now to the upper trendline which looks like a wave c that may stop at 0.7350 area next week and make a new turn lower.

NZDUSD, 1H

Pound is one of the strongest this week, now again at new highs, currently near 1.3600 which can be wave three so be aware of more upside after any intraday set-back. Trend is now up as long as market is above 1.3400.

GBPUSD, 1H

GBP/USD - 1.3565

New strategy  :

Buy at 1.3490, Target: 1.3600, Stop: 1.3455

Position : -

Target :  -

Stop : -

Although cable has eased after intra-day rally to 1.3617 and minor consolidation below this level would be seen and pullback to 1.3510-20 is likely, reckon 1.3490 would limit downside and bring another rise later, above said resistance at 1.3617 would extend recent upmove to 1.3650 and possibly towards 1.3675 but upside should be limited to 1.3700-10, bring retreat later.

In view of this, would not chase this rise here and would be prudent to buy cable on pullback as 1.3490-00 should limit downside. Below the Kijun-Sen (now at 1.3460) would defer and suggest an intra-day top is formed, risk correction to 1.3420, then 1.3400.

Daily Pivots: (S1) 109.85; (P) 110.44; (R1) 110.82; More...

USD/JPY's rise from 107.31 resumed after brief retreat. The development argues that fall from 114.49 is already completed at 107.31. Intraday bias is back on the upside for retesting 114.49 resistance first. Break will also confirm completion of correction from 118.65. On the downside, below 109.54 minor support will turn bias back to the downside for 107.31 instead.

In the bigger picture, rise from 98.97 (2016 low) is now seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Daily Pivots: (S1) 0.9598; (P) 0.9651; (R1) 0.9686; More....

Failure to sustain above 0.9679 and break of 0.9582 minor support maintains bearish in USD/CHF. Intraday bias is turned back to the downside for 0.9420 support first. Break there will resume whole decline from 1.0342. However, break of 0.9704 will turn focus to 0.9772 resistance. Break there will confirm near term reversal.

In the bigger picture, current development suggests that 0.9443 key support (2016 low) could be taken out firmly as down trend form 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

EUR/USD - 1.1970

Original strategy  :

Bought at 1.1855, met target at 1.1955

Position : - Long at 1.1855

Target :  - 1.1955

Stop : -

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As the single currency found support at 1.1838 yesterday and has staged the anticipated rebound, our long position entered at 1.1855 met target at 1.1955 (with 100 points profit) and mild upside bias remains for gain to 1.1995-00 (previous resistance and 61.8% Fibonacci retracement of 1.2093-1.1838), however, break there is needed to signal the fall from 1.2093 has ended, bring subsequent rise to 1.2030-35 but overbought condition should cap price below 1.2050.

As we have taken profit on our long position entered at 1.1855, would not chase this rise here and would be prudent to stand aside for now. Below 1.1920-25 would signal an intra-day top is formed instead, bring weakness to 1.1900 but break there is needed to confirm, then fall to 1.1870-75 would follow.

Daily Pivots: (S1) 1.1862; (P) 1.1892 (R1) 1.1947; More...

Intraday bias in EUR/USD remains neutral at this point. With 1.1822 support intact, near term outlook stays bullish for another rally. Above 1.1994 minor resistance will turn bias to the upside for 1.2091 resistance first. Break will extend larger rise from 1.0339 and target next key fibonacci level at 1.2516. But considering bearish divergence condition in 4 hour MACD, break of 1.1822 will confirm short term topping and bring deeper fall back to 1.1661 support and below.

In the bigger picture, rise from medium term bottom at 1.0339 is still in progress for 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall fro 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside. But after all, break of 1.1661 is needed to indicate medium term topping. Otherwise, outlook will remain bullish in case of pull back.

USD/JPY - 110.95

New strategy  :

Stand aside

Position :  -

Target :  -

Stop : -

The greenback found renewed buying interest at 109.55 yesterday and has resumed recent upmove as price broke above resistance at 111.04 on active cross-selling in yen, however, loss of upward momentum should prevent sharp move beyond 111.40-45 (50% projection of 107.32-111.04 measuring from 109.55) and price should falter well below 111.85-90 (61.8% projection), bring correction later.

In view of this, would not chase this move here and would be prudent to stand aside for now. Below the Kijun-Sen (now at 110.45) would bring correction to the lower Kumo (now at 110.11) but only break there would signal an intra-day top is formed, weakness to 109.80 would follow but said support at 109.55 should remain intact.