Markets like US data weak – but not that weak.
Global growth concenrs may well be overblown, but until data provides some reassurance, risk will not rebound.
Favourite ‘risk off’ trades v. USD are short CAD, SEK, NZD; In Xs long NOKSEK, short CADJPY & GBPNOK.
When it comes to US data, risk appetite displays a notable Goldilocks syndrome – markets do not like it too hot or too cold. Soft data implies lower rates for longer but without forcing a questioning of the assumption that growth is continuing and sustainable, even if somewhat lacklustre. But yesterday’s miserable economic news led to fears that the US “soft patch” might be something more serious. The key releases were certainly ugly, with ADP employment coming in at a meagre +38k and ISM showing a 7 point drop. Bond markets rallied and as US equity market losses reached about 1.5% the USD caught a true safe-haven bid. Unsurprisingly CHF and JPY were the day’s two biggest winners. But that SEK was the biggest loser in G10 does suggest that a re-pricing of global growth prospects was a genuine driver of Wednesday?s price action — Sweden being the most highly leveraged G10 economy to the global growth cycle.
But we think that the concerns over a US ?double dip? and global growth are overblown and premature. We have long expected some softness in Q2 data, and the supply chain impact from Japan is a compounding factor. At the same time weaker European Q2 growth indicators (bar Switzerland) are coming off a truly exceptional Q1 Eurozone performance by the core countries. But even if markets may have over-reacted somewhat, they are unlikely to reverse yesterday’s action without some positive news to ease concerns and to take the edge off the negatives. Today’s much stronger Australian retail sales print was not enough to reverse sentiment – only providing a temporary boost to the AUD as Shanghai equities came under pressure on speculation of a Chinese rate hike over the holiday weekend. With no candidates on the data calendar today – the assumption must be that initial claims will once again come in over 400k and that April factory orders will be weak as per ISM – markets will have to wait till NFP tomorrow. A merely weak NFP in the 100-150k range might be enough to see markets revert to the more familiar weak US data = positive risk dynamic. In the meantime, our favoured scenario is a rangey session with a bias for softer risk.
But with equity markets in the driving seat, we doubt that current still-short USD positioning will survive another 200-300 point down-day for the Dow. If yesterday?s FX price action is a harbinger of more to come then within the G10 FX sphere our ?best of trades? looks something like: 1. Long USDCAD more so than AUDUSD short (China will protect its growth rate via fresh stimulus if necessary; Canada is beholden to the US growth cycle); 2. EUR/USD short simply because EUR is the main USD antipole; 3. USDSEK long (as per above); NOKSEK long for the same reason plus Norway is best placed fiscally to protect its growth; 4. Short NZDUSD (narrowest exit within G10). Among crosses, CADJPY short and GBPNOK short were already on our favourites list and paying well but CADJPY has scope to break below the bottom of the recent range, and GBPNOK to go all the way back to its recent lows near 8.70.
Click here to read the full report:
http://www.easyforexnews.net/uploads/2011/06/Daily-FX-Str_Europe_02June2011.pdf
BNP Paribas
Corporate & Investment Banking