- EU Summit meets expectations allowing EURUSD to break 1.4000
With the EU Summit having ticked most of the boxes in terms of expectations, risk appetite has rallied and the USD has weakened across the board with high beta currencies taking the lead. Risk appetite could be sustained given that we will have further positive catalysts coming from the Q3 US GDP report later today (more below). We continue to view the EURUSD rally as having further legs. The EU Summit yesterday broadly met expectations: Eurozone leaders agreed that the EFSF will be leveraged by four to five times to about EUR 1.0tn (USD 1.4tn). After hard negotiating, it was agreed that the private sector would have to voluntarily accept a 50% haircut on the value of Greek bonds so as to reduce Greece’s debt burden to 120% GDP by 2020 (from 160% at present). Taking this into account, it was determined that the European banking sector would have to raise EUR 106 billion to achieve a 9% core tier 1 capital ratio by mid-2012. Expectations that China will also invest in the EFSF has had some impact as well. Today, French President Sarkozy and Chinese President Hu Jintao are scheduled to discuss the Chinese participation in the SPIV, while EFSF CEO Klaus Regling will be in China tomorrow before travelling to Japan next week.
- US GDP to confirm positive US growth momentum and boost risk appetite
After a disappointing H1 2011 in the US, H2 2011 should kick off on a positive note. We expect US Q3 GDP (1330 BST) to be reported at 2.3%q/q saar on better auto and services spending as well as solid private investment growth. This should solidify the recent positive sentiment on the US and prove supportive for risk.
- BoJ policy easing unlikely to soften JPY
As had been flagged by the local press, the Bank of Japan eased policy further today by raising their asset buying pool by 5 trillion to JPY 20 trillion. The entire increase will come from additional purchases of government bonds. Meanwhile, FinMin Azumi continued to warn that they could intervene, though we doubt that anything short of coordinated intervention will have a meaningful impact. Indeed, USDJPY is lower even after the BoJ decision, indicating a disappointment with the outcome of the meeting. We continue to hold our short USDJPY position established at 77.40.
- RBNZ maintains a tightening bias. Dovish Riksbank today could weigh on SEK; German CPI due
Earlier today, the RBNZ maintained rates at 2.50% as expected but maintained a tightening bias saying that domestic pressure will require future rate rises. However, the RBNZ noted that rate rises will be contingent on global developments, but thus far, these developments have had only a mild impact on the economy. NZD should regain traction in an environment where most G10 FX central banks are headed for further easing. The Riksbank decision this morning (0830 BST) will likely culminate in rates being kept unchanged at 2.00%. However, our economists continue to look for a 25bps cut in February 2012 due to the slowdown in growth and moderation in inflation. If the Riksbank drops such hints, SEK could suffer a setback particularly against NOK (see Chart). Ahead of next week’s ECB decision, German CPI due later today will be of some importance. We expect HICP to hold at 2.9%y/y, an outcome unlikely to strengthen hopes for a rate cut as early as next week even though the pressure for a action (including it would seem the IMF) is rising.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/10/Daily-FX-Str_Europe_27Oct2011.pdf
BNP Paribas
Corporate & Investment Banking