- FX finally takes fright at US ratings risk
- Solid AAA G10 credits may have further to run
- Upside AU CPI surprise could see new AUDUSD highs
Last weekend’s failure of US politicians to reach an outline agreement on a budget deal may have had only limited impact on Monday’s FX market, but the spectacle of House leader Boehner and President Obama both giving finger-pointing press conferences late on Monday night finally had FX markets taking fright and selling dollars across the board. Stability in Euro-peripheral spreads may have also helped EURUSD, but for the most part Tuesday was all about the US debt and dawning realisation that the deal that eventually gets done and which should avert a debt default is probably not going to satisfy S&P.
A two-step deal, similar to that currently proposed by the Republican controlled House of Representatives, is currently our base case scenario for what wins the day and meaning that the debt ceiling may well not be raised enough to get us through the 2012 Presidential elections. In such circumstances we think S&P will downgrade the US, and that one or both of Fitch and Moody’s may well follow suit next year. Under such a scenario and given that a Reuters poll published Tuesday shows only 30 economists (BNP Paribas included) out of 53 expect a downgrade, we see potential for some further ‘sticker shock’ from the news of a downgrade that would mean additional knee-jerk dollar weakness.
It may be no co-incidence that the top-three performing currencies on Tuesday were SEK, NOK and AUD, all solid AAA credits and which we would except to receive additional inflows form the full spectrum of investor classes in the event of a US downgrade. New Zealand, where Fitch has the current AAA domestic rating on negative outlook and Canada, that tends to get tarred with a weak-USD brush, fared relatively less well. We still like carrying long NZD positions into Thursday’s RBNZ rates decision and statement, but in the absence of a very hawkish RBNZ statement suspect that SEK NOK and AUD – the latter especially – will find upside progress easier if ratings risk remains the dominant market focus.
On AUD specifically, Wednesday’s Q2 CPI is going to be important and where anything higher than the 0.7% QoQ consensus for the RBA-preferred trimmed mean and weighted median outcomes will inevitably call into question current money market pricing for between 25 and 50bps of policy easing from the RBA in the coming year. RBA Governor Stevens’ speech Tuesday, which suggested no inclination to respond to current evidence of weaker consumption (he suggests it will naturally pick up as the recent surge in the savings ratio likely reverses) also challenges consensus market thinking. We continue to forecast an RBA tightening in December albeit with risk skewed to later, but should core CPIs print 0.9% or higher, August becomes a live risk. AUD would likely rocket through the 1.1012 record high.
Other FX-sensitive releases Wednesday are highlighted by the Swiss KOF but which will need be a fair bit weaker than the 2.11 consensus to soften CHF; German CPI (where any evidence of acceleration would challenge current ECB thinking); and US durable goods orders, where signs that Q3 is shaping up to be better than the 1% we expect for Q2, are desperately sought.
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http://www.easyforexnews.net/wp-content/uploads/2011/07/FX-dailyJuly27.pdf
BNP Paribas
Corporate & Investment Banking