Correlation breakdown no more in global FX market, risk aversion back

One reason for the delayed reaction in the FX markets could be that a lot of negatives are already in the FX price - especially bad news regarding Chinaand/or the global economy. The currency markets may have moved ahead of other markets and now the others are catching up. That said, more evidence of further significant deterioration in the upcoming Chinese PMI data could see risk correlated-currencies selling off again. 

An important factor behind the relative resilience of AUD and NZD in particular is the rather stable CNY of late. Some clients have highlighted in this regard that the visit of the Chinese President Xi to the US maybe among the reasons for the recent PBOC interventions to stabilise the FX market. With the state visit coming to an end, the risk is that CNY could depreciate yet again and this could keep AUD and NZD under pressure. 

NOK and CAD could be vulnerable on the day as well ahead of the Norwegian retail sales and the Canadian industrial production data, argues Credit Agricole. Up until recently the USD seemed to have decoupled from the persistently weak US equities. One could argue that the same factor that drove the relative USD resilience was also weighing on the US stocks - the market bets on Fed lift-off fairly soon that were re-invigorated by various FOMC speakers in recent days. 

"The improvement in US data this week (NFP) could encourage renewed USD strength while helping the US equity markets recover some lost ground. Therefore,   ourconstructive USD outlook over longer-term is maintained", states Credit Agricole.

Apart from growing risk aversion in the G10 FX markets, on the day, investors' focus will likely be on the German and Spanish CPI ahead of the flash Eurozone HICP estimate for September. Potential disappointments will highlight that the renewed decline in global commodity prices is more than offsetting the positive impact from the ECB's QE, added Credit Agricole.