Developed Countries

Highlights Portfolio Strategy The hardening insurance market on the back of firming demand for insurance services especially in residential real estate and automobile markets compel us to lift insurers to a benchmark allocation. A resurgent stock-to-bond ratio, the reopening of the economy and receding fiscal policy, election and COVID-19 uncertainties which will further suppress the equity risk premium, all boost the allure of the S&P asset management & custody bank index. Stay overweight.  Recent Changes Upgrade the S&P insurance index to neutral and lock in relative gains of 38%, today. This move also augments the S&P financials sector weighting to a modest overweight stance. Table 1 Feature News of a vaccine last Monday turbocharged equities to new intraday all-time highs, following up from a stellar performance the week of the election as odds of a “Blue Wave” collapsed. One of the implications is that the Trump corporate tax cuts will remain in place and investors breathed a sigh of relief (tax policy uncertainty shown inverted, Chart 1). While a smaller fiscal package owing to a split government postponed the rotation trade, the PFE vaccine efficacy news brought it back with a vengeance. This set up caused equities to discount all the good news in a heartbeat as typically happens when uncertainty is sky high and investors stampede into stocks. As we have argued here a VIX with a 40 handle was overdone and thus we crystalized our gains and closed our long VIX December futures trade prior to the election. We have been preparing our portfolio for such a looming rotation and this has been most evident in our long “Back To Work”/short “Covid-19 Winners” equity baskets. Last Monday they went in polar opposite directions and compelled us to put a trailing stop at the 10% return mark in order to protect profits (top three panels, Chart 2). Chart 1Tax Policy Uncertainty Relief Our recent preference of small caps at the expense of large caps that we first recommended a week before the election also depicts the ongoing equity market rotation out of overvalued tech stocks and into beaten down laggard cyclicals (bottom panel, Chart 2). Importantly, the economic reopening trade is still in the early innings, and we remain cyclically bullish on the prospects of the S&P 500 with a fresh end-2021 target of 4,000 that we updated last Monday in a Special Report before news of a vaccine hit the wires. Nevertheless, the recent parabolic rise in equities raises the obvious question: have stocks run too far too fast? Chart 2“Back To Work” Recovery First, there is no doubt that equities are overextended in the near-term as the collapse in the equity put/call (EPC) ratio highlights. Over the past year, the EPC ratio has formed a clearly defined range and a reading below 0.4 suggests overbought conditions (EPC ratio shown inverted, Chart 3). Second, while the violent rotation has pushed the SPX higher despite the deflating tech sector, we doubt that in the coming weeks the SPX will continue to gallop higher without the heavyweight tech sector partially participating in the rally. As a reminder, adding FANG (FB, AMZN, NFLX & GOOGL) weights to the GICS1 tech sector’s weighting results in a roughly 40% market cap weight of tech-related stocks in the S&P 500 (Chart 4). Chart 3No More Hedging Chart 4Tech Is 40% Of The Market   Third, according to the American Association of Individual investors (AAII), bulls are back in droves and the AAII bull/bear ratio has slingshot to the highest level since January 2018. This is cause for near-term concern as it has historically served as a reliable contrary signal (Chart 5). Fourth, the knee-jerk equity market reaction on the back of the positive vaccine news has also pushed the percentage of SPX stocks trading above their 200-day moving average to a zenith, warning that the SPX will most likely move laterally (Chart 6). Chart 5Bull Stampede Chart 6Too Far Too Fast? Finally, following a rough September and choppy October, seasonality is now in favor of owing stocks and given diminishing odds of year-end tax loss selling, equities should grind higher as 2020 draws to a close. Netting it all out, in the short-term our going assumption is that, barring exponential moves in the reopening trade similar to what we witnessed last week, the SPX will likely move sideways in order to digest the recent up move and work off overbought conditions. This is especially true if a selloff in the bond market continues to weigh on the tech sector’s still lofty valuation footprint. This week we make a sub-surface financials sector tweak that pushes this early cyclical sector to a modest above benchmark allocation. Time To Lock In Gains On Insurance The shifting macro landscape signals that it no longer pays to be bearish insurance stocks; thus we are upgrading the S&P insurance index to a neutral weighting today, crystalizing relative gains of 38% since inception. This cyclical underweight exposure in insurance stocks – as part of our barbell portfolio strategy within the financials universe – has cushioned the blow from our positive bank exposure and served its hedging purpose. Now that the election uncertainty is waning and given the recent positive PFE news on the effectiveness of their COVID-19 vaccine, insurance stocks will at least catch a bid. The economic reopening underscores that home and auto sales will continue to climb as nonfarm payrolls make a run for the pre-recession highs likely sometime in 2021. Keep in mind that consumers’ plans to buy a new car and a home are recovering smartly according to the most recent Conference Board survey (third panel, Chart 7). This upbeat demand backdrop for these key insurance end-markets should boost industry profits (bottom panel, Chart 7). Already a hardening insurance market (second panel, Chart 8) owing to pent-up residential real estate and automobile demand is a boon for underwriting results. Chart 7Insuring Gains Chart 8Hardening Market Importantly, the latest national account data corroborates firming final demand for insurance services: consumer outlays on insurance are galloping higher. The upshot is that the insurance valuation de-rating will transition to a rerating phase (bottom panel, Chart 8). Our Insurance Indicator does an excellent job in encapsulating all these moving parts and heralds rosier days ahead for relative share prices (second panel, Chart 9). However, there is a caveat that prevents us from swinging all the way to an overweight stance. Insurance CEOs have been anything but disciplined. Headcount is surging and industry wages are also accelerating. While executives may be preparing for a durable rebound in the coming months, a spiking wage bill will eat into insurance margins (third & bottom panels, Chart 9). Netting it all out, a hardening insurance market on the back of firming demand for insurance services especially in residential real estate and automobile markets compel us to lift insurers to a benchmark allocation. Bottom Line: Upgrade the S&P insurance index to neutral today, cementing relative profits of 38% since inception. This upgrade bumps the broad S&P financials sector to a modest overweight stance. The ticker symbols for the stocks in the S&P insurance index are: BLBG: S5INSU - AIG, CB, MET, MMC, PRU, TRV, AFL, AON, ALL, PGR, WLTW, HIG, PFG, L, CINF, LNC, AJG, UNM, AIZ, RE, GL, WRB. Chart 9One Positive And One Risk Stick With Asset Management & Custody Banks While we have moved to the sidelines on the S&P banks and S&P investment banks & brokers groups, we have maintained bank-related exposure via the S&P asset management & custody banks (AMCB) index and today we reiterate our overweight stance in this early cyclical group. Recent news of industry M&A activity has propped up stocks in this index. Any reduction of supply is great news not only because investors have fewer constituents available to deploy capital to, but also because of oligopolistic power with positive industry pricing power knock-on effects. Tack on the recent selloff in the bond market and factors are falling into place for a durable outperformance phase in the S&P AMCB index (top panel, Chart 10). In fact, the stock-to-bond ratio has caught on fire of late forecasting a pickup in momentum in relative share prices (middle panel, Chart 10). Fund flows are also emitting a bullish signal. Historically, increasing bond and equity fund flows have been positively correlated with the relative share price ratio and the current message is positive (bottom panel, Chart 10). Our view remains that the economy will continue to reopen in 2021 and news of the PFE vaccine reiterates our thesis. Thus, as economic uncertainty lifts, it should lead to multiple expansion in this beaten down early cyclical industry (middle panel, Chart 11). More broadly speaking, receding fiscal and election uncertainties should push down the still high equity risk premium and boost the allure of the S&P AMCB index (bottom panel, Chart 11). Chart 10Increasing Flows Are  A Boon Chart 11A Play On The Economic Reopening Securities lending is another source of income for the industry. Oscillating margin debt balances are an excellent demand gauge for such income producing services. Recently, margin debt has made a run for all-time highs in level terms, expanding at a near 20%/annum clip, underscoring that an earnings led advance is in the offing (bottom panel, Chart 12). With regard to earnings, there is broad-based skepticism on the industry’s profit growth recovery prospects both on a cyclical and structural time horizon. The middle panel of Chart 13 highlights that over the past two decades every time sell-side extreme pessimism reigned supreme, it was a good contrary signal. More precisely, when relative 12-month profit growth expectations sink to negative double digits, a reflex rebound typically ensues. We doubt this time will prove different. Chart 12Follow The Margin Debt In sum, a resurgent stock-to-bond ratio, the reopening of the economy and receding fiscal and election uncertainties which will further suppress the equity risk premium, all boost the allure of the S&P AMCB index. Chart 13Lean Against Extreme Analyst Pessimism Bottom Line: We continue to recommend an above benchmark allocation in the S&P AMCB index. The ticker symbols for the stocks in this index are: BLBG: S5AMGT – BK, BLK, STT, AMP, NTRS, TROW, BEN, IVZ.     Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com   Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views October 26, 2020 Favor small over large caps July 27, 2020 Overweight cyclicals over defensives June 11, 2018 Long the BCA Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, TSLA, V). January 22, 2018 Favor value over growth

The market has rallied roughly 10% this month, and while we remain cyclically and structurally bullish, a short-term consolidation period is likely in the cards. As Chart 1 highlights below, extremely easy financial conditions along with a near halving in implied volatility – which have been key rally drivers since the March lows as we pointed out numerous times in our research – are nearly perfectly priced in the SPX. The implication is that if a meaningful rally is to resume, further easing is required.  Another factor underpinning the market’s recent advance is the drop in the CBOE’s implied correlation index (pair wise correlation of S&P500 constituents, shown inverted, Chart 2). However, correlations have collapsed and are near levels that have marked prior temporary peaks in the SPX. Bottom Line: A short-term consolidation phase is likely in the cards  

Highlights The DXY is still overvalued by 13%, despite the 10% drop since March. The Scandinavian currencies remain very cheap. The Japanese yen should be a core holding in every currency portfolio. It is cheap relative to the US dollar, and a great hedge against market volatility. Outside the US dollar, the New Zealand dollar is also expensive. Our positioning is largely in line with PPP fundamentals. Stay short EUR/GBP, CAD/NOK, NZD/CAD and USD/JPY. We are also long a basket of petrocurrencies (NOK, CAD, RUB, MXN and COP) against the euro. Feature Inflation dynamics are a very powerful determinant for the trajectory of a currency. If inflation is high and rising in one country relative to another, then the currency should depreciate to equalize prices across borders. Otherwise, the high-inflation currency becomes incrementally expensive. Over time, by gauging relative shifts in prices, one can ascertain where a currency rests relative to its long-term fair value. This is the basic theory behind purchasing power parity (PPP).   In practice, PPP can be a very poor timing tool for managing currencies. Inflation tends to be a lagging indicator, making timely decisions based on PPP modeling futile. Meanwhile, there are also measurement issues, given the difference in consumer price baskets across countries. For example, shelter is 33% of the US CPI basket but only 17% in the euro area. The rising share of services in many economies also renders the PPP exercise less relevant, given the difficulty is arbitraging those prices away. It is rather difficult to import a haircut from Manila into Canada, though there could be a huge price differential. US inflation has been blasting downwards since the start of the year and by most indicators will remain very tepid in the near term.  That said, there are two crucial benefits that come from the PPP exercise. First, most currencies tend to be mean reverting around their PPP fair value. This is especially true if the deviations from fair value are especially large. For developed market currencies, 20-30% deviations from fair value are extremely rare, making such occurrences very potent bets for a reversal. Second, by creating a synthetic CPI basket for each country that equalizes the weights of various items across countries, one gets much closer to an apples-to-apples comparison.1 The Adjustment Chart I-1The Dollar Move This Week Was Unusual We make two adjustments. First, we divide the CPI baskets into five major groups. Second, we run two regressions with the exchange rate as the dependent variable. The first regression (REG1) uses the relative price ratios of the five groups2 as independent variables. This allows us to observe the most influential prices that help explain variations in the exchange rate. The second regression (REG2) uses a weighted average combination of the five groups to form a synthetic relative price ratio. If, for example, household goods are 3% in the US CPI basket, but 9% in the Australian CPI basket, a new synthetic price basket will have a 6% weight for household goods. Given the big move in currencies since the March 19 peak in the DXY index, we are updating these models to see where value lies within the G10 and to provide a more grounded anchor to our relative value trades. The results show the US dollar as still overvalued, especially versus the Swedish krona and Norwegian krone (Chart I-1). Within the safe haven complex, the Japanese yen remains very attractive. The rally in the euro has eroded the valuation cushion that was much evident at the start of the year. Our positioning is largely in line with PPP fundamentals. We are short EUR/GBP, CAD/NOK, NZD/CAD and USD/JPY. We are also long a basket of petrocurrencies (NOK, CAD, RUB, MXN and COP) against the euro. This is a play on both relative fundamentals and valuation. The US Dollar Chart I-2Downside Risks To US Inflation US inflation has been blasting downwards since the start of the year and by most indicators will remain very tepid in the near term (Chart I-2). This could force the hand of the Federal Reserve into injecting more stimulus into the economy. Services remain a very important component of US CPI, especially shelter. The shelter CPI (33% of the consumption basket) component has dramatically softened from about 3.3% at the start of the year to about 2% today. That said, prices have been disinflationary globally and not just in the US. This means that despite the drop in US CPI, the fair value of the currency continues to fall given weaker prices outside the US (Chart I-3). According to REG2, the US dollar is still overvalued by 13%. REG1 has a higher fair-value for the currency, since household good and transportation prices have been drifting lower in the US and are captured more fervently in this regression. Our long-term view on the US dollar remains bearish. The Fed now has an asymmetrical inflation target. This means willingness to allow for an inflation overshoot, as the Fed will not fight upside surprises in inflation with tighter monetary policy anytime soon. This will dampen the long-term fair value of the US dollar, compared to its G10 peers. Chart I-3The Dollar Is Expensive The Euro Chart I-4The Euro Is Cheap The euro area has stepped back into deflation, at a time when the European Central Bank is running out of monetary policy bullets. Annual CPI in September came in at -0.3%, which explains why the fair value of the euro has been rising relative to the USD (Chart I-4). Most components of the CPI basket in the euro area are declining, including household goods, medicare and shelter. With the pandemic hitting the euro area very hard, food, restaurants and hotels (food and non-alcoholic beverages account for 29% of the consumption basket) have fallen. This has buffeted the fair value of the euro. Shelter's weight in the euro area CPI basket currently stands at 17%. This is a small share compared to the US. This means that more subdued house and rental price increases in the euro area have been beneficial for the fair value of the common currency. Rampant rent controls, especially in places like Germany, have subdued housing CPI. These trends should continue. It is well known that the euro area is relatively open; as such, tradable goods prices are important for the fair value of the euro. On this front, there has been a generalized downtrend in euro area tradeable goods prices. Compared to the Fed, the ECB can do little about this. This is relatively euro bullish, since it will boost real rates and lift the fair value of the currency. The Japanese Yen Chart I-5The Yen Is Quite Cheap The yen remains cheap and is undervalued by both measures around 15% (Chart I-5). Falling relative prices in Japan is the norm, which makes the yen relatively attractive on a recurring basis. Shelter prices have been the big component in the relative decline of Japanese prices. Other prices have been decreasing, especially in culture and recreation where the boom in the tourism industry was crushed by the pandemic. The new Prime Minister, Yoshihide Suga, continues to encourage deflation by targeting lower telecom prices. This is reinforced by the aging population. Encouragingly, BoJ Governor Haruhiko Kuroda remains committed to achieving a 2% inflation target, even though inflation expectations have not been trending in his favor. That means inflation in Japan will likely lag that of other developed countries, lifting the fair value of the yen. The British Pound Chart I-6The Pound Is Cheap While the pound might be driven near-term by political gyrations on the conclusion of Brexit, it is fundamentally undervalued. REG2 suggests the pound is undervalued by 17%. (Chart I-6). The consumption baskets in both the UK and the US are roughly similar, which means traditional PPP models do a good job at capturing the true underlying picture of price differentials. Relative food and restaurant prices have gone up as the UK economy reopened, but energy and transportation costs are down since the oil crisis took hold. Brexit will continue to dictate the ebb and flow of sterling gyrations over the next few weeks, but the reality is that the pound should be higher on a fundamental basis. We are long cable versus the euro on this basis. The Australian Dollar Chart I-7The Aussie Is Slightly Cheap The AUD is undervalued by about 3% as the discount has fallen with the bounce in the Aussie (Chart I-7). As a commodity currency, PPP models are less useful for the AUD than terms of trade, which have been moving in favor of the Australian dollar. Most prices in the Australian consumption basket are up relative to the US. This is especially the case for health, culture and recreation, as well as household goods. Shelter accounts for almost a quarter of the consumption basket. Relative shelter prices in Australia have been improving of late, on the back of waning macro-prudential measures. In the 1980s, inflation in Australia averaged around 8.3% year-on-year. This made the Aussie incrementally expensive, creating grounds for a subsequent 50% devaluation from 1980 to 1986. Inflation targeting was finally introduced and has realigned Aussie prices with the rest of the world. Our bias is that the Aussie will be less driven by price differentials going forward, and more by RBA policy and terms of trade. The New Zealand Dollar Chart I-8The Kiwi Is Slightly Expensive The New Zealand dollar is overvalued by about 5% relative to the US dollar, according to our PPP models (Chart I-8). Like the Aussie, the kiwi is less driven by price differentials and more by terms of trade. Food and shelter account for the largest share of the consumption basket, and relative prices have been moving against the kiwi. Relative shelter prices in New Zealand, which were flat for most of this decade, are reaccelerating anew on low rates and government support. Inflation has moderated considerably in New Zealand since the pandemic hit the global economy. This should keep the fair value of the kiwi stable. Our bias is that going forward, the kiwi will underperform other commodity currencies on valuation grounds. The Canadian Dollar Chart I-9The Loonie Is Cheap The loonie is currently undervalued by about 10% against the US dollar (Chart I-9).  Shelter remains the largest budget item for Canadian households, and relative prices have been rising. Interestingly, shelter CPI does not fully capture skyrocketing house prices in Canada over the last decade, due to measurement differences in owner’s equivalent rent. Since 2005, Canadian house prices relative to the US have doubled but, on the contrary, the relative shelter CPI has trended downwards. These crosscurrents have dampened the CPI explanatory power of the exchange rate. Due to heavy taxation, Canadian consumers are not benefitting from the steep drop in energy costs compared to their US neighbors. Relative energy and transportation costs are up in Canada. That said, terms of trade have been more important for the loonie. As such, rising energy prices will be positive for Canadian incomes and the fair value of the loonie. The Swiss Franc Chart I-10The Swiss Franc Is Cheap USD/CHF is expensive according to our PPP models, despite a structural appreciation of the franc in recent years (Chart I-10). This has been driven by a relative price decline in all categories of the Swiss consumption basket. A large item in the Swiss CPI basket is the food, restaurants and hotels category, and this has been in structural relative price decline. But even more volatile items, such as energy and transportation, have declined of late as well. Headline consumer prices in Switzerland are down -0.6% year-on-year, one of the worst in the developed world. This has significantly boosted the fair value of the franc. As a small open economy, tradable goods prices are important for Switzerland. Given high levels of specialization, terms-of-trade in Switzerland are doing well as imported goods prices continue to deflate. This suggests that Swiss innovation will continue to drive the value of the franc higher. The Norwegian Krone Chart I-11The Norwegian Krone Is Very Undervalued The Norwegian krone is one of the most undervalued currencies, according to our PPP models (Chart I-11). A big swing factor for the krone has been falling energy prices. As a large energy producer, Norwegians pay less for electricity, gas and other fuels. Norway is also a heavy producer of renewable energy, notably hydropower. This makes the domestic energy basket less susceptible to the ebbs and flows of energy prices, even though it is extremely beneficial for terms of trade. As such, the drop in energy prices has eroded the valuation cushion for the NOK, but not by enough to significantly dent deep undervaluation. The Swedish Krona Chart I-12The Swedish Krona Is Very Cheap The krona is the cheapest currency in our universe by a wide margin (Chart I-12). Relative prices in Sweden have been rising, but not by enough to dent the undervaluation in the currency.  Sweden kept its economy mostly open during the entire duration of the pandemic. As such, relative prices, especially those for services such as restaurants and hotels, have held up relatively well. Energy prices have also been a big swing factor in the CPI basket, with the cheap krona boosting domestic fuel costs. Negative rates have also been a boon for the housing market, with prices for both shelter and homes picking up relative to the US. The bottom line is that modest inflationary pressures are to be expected given the steep undervaluation of the krona. But it will require a lot more of a rise in domestic prices to dent the fair value of the SEK.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Special Report, titled “A Fresh Look At Purchasing Power Parity,” dated August 23, 2019, available at fes.bcaresearch.com 2 Group A: Food, restaurants and hotels; Group B: Shelter; Group C: Health, culture and recreation; Group D: Energy and transportation; Group E: Household goods Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data from the US have been mostly positive: Nonfarm payrolls increased by 638K in October, higher than the expected 600K. The unemployment rate declined from 7.9% to 6.9% in October. The NFIB Business Optimism Index was unchanged at 104 in October. Headline inflation fell from 1.4% to 1.2% year-on-year in October. Core inflation also slipped from 1.7% to 1.6%. Initial jobless claims increased by 709K for the week ending on November 6, better than expected. The DXY index fell by 0.4% this week. Risk appetite made a tentative come back earlier this week while downside risks persist. A confirmed Biden presidential victory, together with positive vaccine news from Pfizer make a stronger case for our long-term dollar bearish view. Report Links: The Dollar Conundrum And Protection - November 6, 2020 The Dollar In A Market Reset - October 30, 2020 A Few Market Observations - October 23, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data from the euro area have been negative: The Sentix Investor Confidence Index declined from -8.3 to -10 in November, while still above the expectations of -15.  The ZEW Economic Sentiment Index declined from 52.3 to 32.8 in November. Industrial production fell by 6.8% year-on-year in September. The euro increased by 0.4% against the US dollar this week. We expect the euro to outperform the US dollar should global growth recover in the coming months. Many economic indicators are consistent with this view: the trade balance in the euro area remains very positive; relative bond yields are quite attractive; lastly, the gap between the economic surprise index with the US is also closing. Report Links: The Dollar Conundrum And Protection - November 6, 2020 Addressing Client Questions - September 4, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 The Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data from Japan have been positive: The Coincident Index slightly increased from 79.4 to 80.8 in September. The Leading Economic Index also ticked up from 88.5 to 92.9. Preliminary machine tool orders declined by 5.9% year-on-year in October. This is a considerable improvement compared to the 15% drop in the previous month. The Eco Watchers Survey Outlook Index increased from 48.3 to 49.1 in October. The Current Index also climbed from 49.3 to 54.5. The Japanese yen declined by 0.8% this week against the US dollar with a more optimistic backdrop for global growth. That said, we continue to favor the Japanese yen as a safe-haven hedge as the yen could still outperform the US dollar in a pro-cyclical environment. The Summary of Opinions released by the BoJ this week highlighted that Japan’s economy is likely to follow an improving trend at a moderate pace. Report Links: The Dollar Conundrum And Protection - November 6, 2020 The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data from the UK have been positive: GDP increased by 15.5% quarter-on-quarter in Q3, following the 19.8% plunge in the previous quarter. Halifax house prices increased by 7.5% year-on-year over the past three months to October. Retail sales increased by 5.2% year-on-year in October. The British pound appreciated by 1.1% against the US dollar this week. The UK is one of the countries hit hardest by COVID-19 as its services sector is a large component of GDP. The UK is also well prepared for the vaccine this time and is likely to benefit most from the vaccine distribution. We remain bullish on the British pound and are playing the GBP upside via the euro. Report Links: The Dollar Conundrum And Protection - November 6, 2020 Revisiting Our High-Conviction Trades - September 11, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data from Australia have been positive: The NAB Business Confidence Index increased from -4 to 5 in October. The NAB Business Conditions Index also ticked up from 0 to 1. The Australian dollar appreciated by 1.2% against the US dollar this week. As the NAB November 2020 Global Forward View pointed out, incoming GDP data confirms a substantial but incomplete rebound in the third quarter globally. Besides, stronger manufacturing conditions in the EM space firmly support the Australian economy and the Aussie dollar. Moreover, the RBA’s policy remains highly accommodative, which should support domestic economic activity. Report Links: An Update On The Australian Dollar - September 18, 2020 On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data from New Zealand have been mixed: REINZ house prices increased by 3.5% month-on-month in October. Visitor arrivals continued to fall by 96.7% year-on-year in September. Two-year inflation expectations edged up from 1.43% to 1.59% in Q4. The New Zealand dollar surged by 2.4% against the US dollar this week. On Wednesday, the RBNZ held the official cash rate unchanged at 0.25% and sounded more optimistic about the economic outlook. This was a marked difference from market expectations of negative rates. The bank did reaffirm a funding for lending program, which will allow banks to obtain cheap funds for lending. This was esteemed more potent than a negative OCR. That said, the Bank is ready to deploy negative rates by year end if needed. Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data from Canada have been positive: The unemployment rate declined from 9% to 8.9% in October. The participation rate ticked up from 65% to 65.2%. Average hourly wages increased by 5.3% year-on-year in October. Employment increased by 84,000 in October. Bloomberg Nanos Confidence was unchanged at 52.5 for the week ending on November 6th. The Canadian dollar appreciated by 0.6% against the US dollar this week. Higher hopes for a vaccine provide a positive backdrop for the transportation sector, supporting energy prices and petrocurrencies including the Canadian dollar. We remain positive on the CAD against the USD while negative on the CAD against higher beta petrocurrencies such as the NOK. Report Links: Currencies And The Value-Versus-Growth Debate - July 10, 2020 More On Competitive Devaluations, The CAD And The SEK - May 1, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data from Switzerland have been positive: The unemployment rate fell from 3.4% to 3.3% in October. FX reserves declined from CHF 873.5 billion to CHF 871.5 billion in October. Total sight deposits were unchanged at CHF 707.6 billion for the week ending on November 6. The Swiss franc remained flat against the US dollar this week. While we are positive on the Swiss franc against the US dollar, we do think that the Japanese yen is a better hedge than the franc. Moreover, as we argued in last week’s report, an interesting gap has been opened between EUR/CHF and USD/CHF. Our bias is that the euro will outperform the Swiss franc in coming months. Stay long EUR/CHF. Report Links: The Dollar Conundrum And Protection - November 6, 2020 On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data from Norway have been mostly positive: Manufacturing output fell by 0.5% month-on-month in September. Headline inflation increased from 1.6% to 1.7% year-on-year in September. The Norwegian krone appreciated by 2.3% against the US dollar this week. The Norges Bank decided to keep the policy rate accommodative at low levels last week to support economic recovery. Our Commodity and Energy strategists now forecast Brent prices to reach $65 - $70 /bbl by 2025. We believe that the Norwegian krone will follow the energy price higher as travel restrictions are being lifted in the post-vaccine world. Report Links: Revisiting Our High-Conviction Trades - September 11, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 Building A Protector Currency Portfolio - February 7, 2020 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data from Sweden have been mostly negative: The budget deficit widened from SEK 13 billion to SEK 36 billion in October. Household consumption fell by 3.8% year-on-year in September. Headline inflation declined from 0.4% to 0.3% year-on-year in October. The Swedish krona appreciated by 1.7% against the US dollar this week. Scandinavian central banks, including the central banks of Norway, Sweden and Denmark, have entered into a new agreement for currency swap facilities to strengthen contingency. This will help cushion further damages from a prolonged health crisis. We continue to favor the Nordic currencies and will buy the Nordic basket again on 2% drop. Kelly Zhong Research Analyst Report Links: Revisiting Our High-Conviction Trades - September 11, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades