Resumption of Wednesday’s risk rally could provide support for EURUSD despite EUR risks
The world looked like a much better place on Wednesday as risk rallied keeping high beta currencies like SEK, AUD, and NZD well in demand. AUD could receive further support this morning from an improvement in the employment numbers especially after the strong Q2 GDP outcome. Much of today’s risk rally can be attributed to Eurozone events. As expected the German Constitutional Court ruled that Germany’s participation in the EFSF was legal, and Italy’s senate approved a much more austere budget plan. The bill now goes to the Lower House for final approval, where it is expected to pass as well. These measures are overall positive and should provide support for the Italian bond market, but we are not out of the woods yet. Implementation risks remain as does the pressure on Greece to pick up the pace on fiscal consolidation. But, the focus for Thursday will be on the ECB meeting; we expect the ECB to lower its forecasts to enforce that it will remain on hold for the coming months. While we suggest selling EURUSD on rallies towards the 1.42 area, a resumption of the overnight rally in equities should provide support for EUR as the USD comes under pressure.
BoE decision for no QE will result in GBPUSD upside
Besides the ECB, the BoE Rate announcement will be important given more QE talk. While we think there is a risk for a QE announcement today, the BoE will more likely wait until November before proceeding, giving them time to downgrade their inflation forecast. If the BoE does not announce QE, we expect GBPUSD to rally. But, we would recommend fading the rally as the BoE minutes will probably contain ample discussion about QE. Meanwhile, Fed Chairman Ben Bernanke is scheduled to speak later today about the US economic outlook. His comments will be of particular interest as it is the only scheduled talk for Bernanke ahead of the FOMC meeting on September 20-21. The market is currently pricing in ‘operation twist’ rather than QE (though Asian markets appear more expectant of QE3). However, our economists believe that QE can happen as soon as September. Until the FOMC meeting, the market will be focused on President Obama’s speech Thursday night. The president is expected to present the details of his USD300bn draft proposal containing a combination of tax cuts, infrastructure spending, and aid to state and local governments. Any plan ahead of an election year will be a drawn out political battle, so may put the onus back on the Fed to stimulate the economy. On the data front, initial jobless claims are expected to rise to 415k (consensus 405k) but with some downside risk from Hurricane Irene.
BoJ considered not in the same category as the SNB
A day after the SNB’s decision to set a floor on EURCHF, a US Treasury official commented that the US supports market based exchange rate policies, but noted that the G7 has said in the past that disorderly movements in currencies are not wanted. He added that the Swiss economy was experiencing disorderly movements. In some sense, the US seems to be justifying the SNB’s move, but discounting any validation for Japan to intervene in the FX markets. USDJPY has effectively remained in a very tight range in the last month and JPY is not particularly strong on a trade weighted REER basis. In search of a new safe haven currency, NOK has already been identified as next in line judging from price action over the past two days. Comments from the Norwegian finance minister that they must be prepared for fluctuations in the currency suggest that any action by the Norwegian government to weaken the currency cannot be ruled out. The NOK market is very small, illiquid in comparison to the other safe havens, and may be unable to cope with massive inflows. The flip side of which is (and we saw last May) that it may also get crushed in any stampede for the exit.
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BNP Paribas
Corporate & Investment Banking