- EURUSD holds well given decent Eurozone Services PMI
- Risk on rally likely today though financials/housing could be an obstacle
- Positioning complicates JPY intervention prospects
Markets in Europe have followed a risk on tone carrying on from Asia with PMI’s in China and Europe suggesting growth is not falling off a cliff. PMI’s in Europe held better with a better performance in the Services sector trumping weaker manufacturing PMI’s. Downside risks to EURUSD so far have failed to materialise; Despite a much weaker German ZEW economic sentiment index in August (-40 from -7), EURUSD has continued to remain well bid with 1.4500 having traded with generalised USD weakness helping.
For today, a continuation of this risk-on sentiment should see the USD under pressure against the usual high beta currencies like NZD and SEK. Expectations for decisive measures ahead of Bernanke’s Friday Jackson Hole speech (even if there is an eventual disappointment) could see 1.4520/40 tested on EURUSD simply on a broad USD weakness argument. However, headwinds could quickly come from further negative news from the US banking sector; the S&P 500 Banks index appear set in a negative dynamic- breaking lower to levels not seen since July 2009. Data wise, today we have US new home sales (1500 London) to contend with where we are in line with consensus looking for a 310K handle.
The Swiss trade balance widened in July however this was on account of much weaker import growth even as real exports contracted more than anticipated. Looking ahead, Friday’s release of the KoF leading index for August will be important, with consensus looking for a decline to 1.80 (from 2.04). Expectations that the SNB may peg the franc to the euro persist, and while nothing can be ruled out, we believe that it is unlikely to happen. Elsewhere, stronger Norwegian Q2 GDP (mainland +1.0% q/q from +0.5% in Q1) showed that growth continues to hold up rather well. EURNOK has failed to close above its 200-day moving average yesterday and is now attempting to grind lower.
Japanese officials continue to express concern about yen strength, with the volume only likely to build ahead of the DPJ leadership election expected on Monday. Accordingly we continue to see intervention risk build as the week progresses, even if from a market point of view there seems little to argue for intervention just ahead of Jackson Hole. Positioning complicates the issue: while CTAs are undoubtedly short USDJPY and may have to stop out on intervention, the rest of the market is likely to work in the opposite direction. Exporters are assumed to be lining up around the 80 level; while hedge funds have taken back some of their shorts and are likely to be looking at the 3-yen gains of previous bouts of intervention as a gauge on where to re-enter. Retail accounts remain very short yen and are likely to be taking profit on any move higher. All this points to a failed intervention – unless the election heralds a change to the strategy and the MoF embarks on a more serious programme of sustained intervention.
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BNP Paribas
Corporate & Investment Banking