- Eurozone headlines to remain in the driver’s seat
Markets have continued to trade the USD in the context of a risk on/off mindset and today risk- on has prevailed with the USD softer across the board. The catalyst in Asia was the expansion of a Japan-South Korea currency swap arrangement by a year and to USD 30bn from 3bn.
The EUR has been better supported, outperforming all G10 currencies (barring the AUD) today as expectations build of some form of plan being announced to increase the firepower of the EFSF ahead of the weekend EU Summit. However, headlines regarding the EFSF will continue drive the market. Yesterday’s market moving Guardian report that France and Germany had agreed to boost the EFSF to EUR2trn through a bond insurance approach was subsequently denied. However, the FT Deutschland this morning reported comments from German FinMin Schaeuble confirming that the ‘bond insurer’ format is the front-runner to leverage the EFSF, but with a maximum capacity of EUR 1tr. EU officials have since also attempted to tone down expectations, noting that no deal has yet been reached on scaling up the EFSF, and that it wasn’t a simple process of multiplying the EFSF’s EUR 440bn capacity.
- BoE minutes underscore potential for more QE
The Bank of England meeting minutes came in rather dovish underlining that further easing could be on the cards. Not only was the decision a unanimous one (with even member Dale voting for QE2), but the range considered was from GBP 50-100bn in asset purchases, with some members seeing the case for larger stimulus than otherwise due to “substantial” downside risks to demand. While members said that QE could be adjusted in “either” direction contingent on developments in the eurozone and financial markets, yesterday’s gloomy commentary from Governor King suggests the bias remains for more QE. Our economists look for a further GBP 50bn in asset purchases coming through by February 2012. UK retail sales tomorrow is likely to confirm the weakness in the consumer sector with headline sales forecast to fall by 0.1% (consensus 0.0%). The weakness in the UK economy further coupled with aggressive monetary easing from the BoE justifies our weak GBP view. We remain short GBPCAD.
- Norges Bank decision due
The Norges Bank meeting is due at 1200 GMT. Despite recent strong data out of Norway, we expect the Norges Bank to remain on hold at 2.25%. In fact increased uncertainty regarding the economic outlook will force the central bank to delay the next rate hike to Q1 next year and this will be reflected in the policy rate profile to be released todayin the monetary policy report. We remain bullish on NOK in the medium term given its relative economic performance in the G10 space and would look for buy NOKSEK on any dips. The key risk to a long NOKSEK position is a rally in risk as SEK tends to perform better in a risk-on environment.
- US CPI and Beige book on tap
In his speech yesterday, Fed chairman Bernanke offered little policy insight, but reiterated the importance of the central bank in ensuring financial stability. While further monetary easing from the Fed may be a hard sell with high inflation, US core CPI later today is likely to moderate further. Headline inflation is likely to increase 0.3%m/m and 3.9%y/y in September, but we do believe that this will be the peak in y/y inflation due to base effects. The Fed Beige Book may indicate a more pessimistic outlook on the US economy than the recent data. However, the housing market – the US economy’s Achilles heel – may show a slight improvement in housing starts after a decline in August.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/10/Daily-FX-Str_US_19Oct2011.pdf
BNP Paribas
Corporate & Investment Banking