- Markets remain volatile but directionless; NZD hit by downgrades:
Risk appetite continues to ebb and flow with headlines of progress and setbacks on Europe. US equities recovered from an early slide to close on a positive note, but futures have turned lower again since; the moves are mirrored by FX markets, which continue to see high intra-day volatility but little overall direction. The big mover on the day has been NZD, hit by a surprise one-two from the ratings agencies, as first Fitch and then S&P downgraded New Zealand. Both agencies cited high external debt amid deteriorating global financial conditions. The next key resistance level for AUDNZD holds at 1.2790, the 100 day moving average. We continue to see 1.30 as achievable. Meanwhile, the SNB’s announcement of its desire to buy more GBP assets led to a GBP rally, even though the SNB said this would likely only occur in a year’s time. Currently GBP comprises only 3% of total SNB FX reserves, down from nearly 12% back in 2007. While this may prove bullish for GBP in the long run, we believe that more accommodative measures from the BoE will result in a weaker GBP in the short term. This is one of the reasons behind our short GBPCAD recommendation published yesterday (just prior to the SNB news!).
- Eurozone inflation today will be key for next week’s ECB meeting:
The passage of EFSF legislation through the German and Estonian parliaments yesterday means that 13 of 17 nations have approved the reforms; Austrian ratification later today should only be a formality. Of the remaining three, Slovakia is the largest hurdle, but a vote is not expected there until October 11. In the run-up to the EcoFin on October 4, headline risk will remain the key driver for the euro, but Eurozone inflation today will be important in the context of next week’s ECB meeting. Core inflation is likely to rebound sharply to 1.4%y/y in September vs. 1.2% in August due to seasonal factors. While a high inflation number may pose a risk to our expectations of a rate cut, we believe that the recent deterioration in economic and financial conditions will lead the ECB to cut rates by as soon as next week’s meeting. However with some 32bp of easing priced in already, it would likely take a 50-point cut to inflict any great harm on the EUR.
- Japanese fiscal half-year ends today – and FinMin Azumi is already fighting further JPY appreciation:
The immediate need to prop up USDJPY ends with the fiscal half-year today, but for those looking for a quick move lower, Japanese FinMin Azumi has a less than encouraging message. As part of a third supplementary budget next month, the FX intervention financing facility will be boosted by a further JPY 15tr, bring funds available for intervention up to JPY 46tr – or about USD 600bn. He also said that the current level of the yen could pour cold water on the Japanese economy. Indeed recent weaker data suggests that the global slowdown is adding to the pressures on the economy; and recent more cautious comments from the BoJ suggest that the central bank may be coming around to a similarly less sanguine view. As such, speculation of further policy easing – even as soon as next week – may not be totally unfounded. We remain yen bulls, but BoJ risks and current positioning suggests potential for a short squeeze into next week: we look to go short USDJPY around the 77.40 level – just below the bottom of the daily ichimoku chart.
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BNP Paribas
Corporate & Investment Banking