C8 Hedge – Currency Compass – October 2024
FX Market and Strategy
A strong start from Currency Compass last month, where we called for a 50bp Fed rate cut camp but noting our currency models point to EURUSD and GBPUSD weakness, so any bounce is a good opportunity to add EUR and GBP hedges. Indeed it was, with EURUSD hitting 1.12 and GBPUSD 1.34 before falling back. Stronger US data, in particular the employment report, helped cement this view, the chart below illustrates how recent US data has pushed up the Atlanta Fed Q3 GDPNow forecast from 2% to above 3%.
Secondly, the view was correct that, with USDJPY hitting our downside target around 140, the USD was likely to be strongest against the JPY. Looking forward, in October, our models remain USD positive, against all three major currencies.
In terms of event risk this month, we see no change in rates by the ECB or BoJ, so focus is on the UK’s first Labour budget for 14 years. For the FX markets, the key may well be the reaction to any rewrite of fiscal rules, but, after the Truss government budget disaster, we expect the new government to show caution. The UK tax burden will rise, with tax rates rising and tax reliefs removed. The problem for the government, is that some measures may prove fiscally neutral at best, so they may well be toned down compared to current expectations. This suggests a relief trade for GBP (full discussion overleaf). Finally, the shadow of the US presidential elections looms large, we will discuss in depth in the next issue, but for now the USD has benefited from improving polls for Trump in swing states, such as Florida (see right).
Currency Focus: GBP and the UK Budget
With major Labour election manifesto commitments on the tax side, there is much anticipation about the UK’s Autumn budget on the 30 October. We see any changes to UK’s fiscal rules having the most impact on GBP, but after the Truss budget disaster two years ago, we expect more caution this time around. In terms of tax measures, already some of the touted changes e.g. limiting pension tax relief have been rejected by public sector unions. The exit of non-doms suggests that these measures may also be scaled back to avoid a negative revenue impact. A negative fiscal impact is likely from large capital gains tax increases and VAT on private school fees.
The latter is a political move so unlikely to be dropped, but the measures around the former may also be watered down. Please find below an excellent review of potential measures courtesy of Radstock Partners. Taking this all together, we see a relief trade for sterling, post the announcement, also aided by the risk that increased government spending on public sector wages leaves the BoE less room to cut than other countries.
Key Event Dates
17 October EU ECB Meeting Expect no rate change, after the 25bp cut in September to 3.50%
30 October UK Autumn Budget Expect higher tax rates and reduced exclusions (see above). Rewrite of Fiscal Rules.
31 October Japan BoJ Meeting Expect no rate change
5 November US Presidential Election Market expectation remains evenly split on Harris v Trump, current momentum with Trump
7 November US FOMC Meeting Expect 25bp rate cut to 4.50-4.75%
7 November UK BoE Meeting Expect 25bp rate cut to 4.75%
12 December EU ECB Meeting Expect 25bp deposit rate cut to 3.25%
18 December US FOMC Meeting Expect 25bp rate cut to 4.25-4.50%
19 December Japan BoJ Meeting Expect 25bp hike to 0.5%
19 December UK BoE Meeting Expect 25bp rate cut to 4.50%