G10: Long GBPUSD
Rationale: With a light data schedule for the US week ahead, we see potential for the GBP to rally the most among G10 currencies against the USD. Firstly, the market is only beginning to acknowledge that the UK economic data may not come in as weakly as expected. Good data prints in services PMI, IP and house prices (following other positive prints in manufacturing PMI and retail sales) may continue to alleviate market concerns regarding the Brexit result and lead to an asymmetrically large rally in GBP crosses. This leads directly to the second point – that market positioning is still extremely short and still has some way to unwind. Finally, while the headline US payrolls number was not particularly weak, slow labor wage growth and a shortened work week should be sufficient (in combination with other weak data prints such as ISM and US political risks) to keep the Fed on hold and progressively price a Sep hike out of the picture over the week. The main risks to the trade are if the upcoming data print unexpectedly worse, and if UK political developments signal a consensus forming around a “hard Brexit” policy cocktail.
EM: Short USDTRY
Rationale: The rationale for being long TRY has not changed much since last week – political risks continue to moderate and a credit ratings downgrade is unlikely to occur in the very near term, giving TRY space to rally further in the meantime. Our reasons for preferring a short USD cross are as above. Given that TRY is particularly sensitive to a dovish Fed, it should benefit disproportionately as a Sep Fed hike gets priced out by the dovish payrolls data. Risks to the trade are mainly posed by adverse developments in the political situation or its credit rating.
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