- Scale of Thursday’s EURUSD run up testament to the scale of the short EUR base
Throughout the explosive run up in EURUSD from sub-1.38 on Wednesday afternoon in New York to above 1.4200 during Thursday’s New York morning/European afternoon session, it was hard to find anyone with anything constructive to say about the euro here… or up here…or up here! This is telling, since it is testament to the view that most of this rally – all the way from 1.3200 – has been a bail-out from short euro positions, held mostly via options among the macro fund community. Having thought this might just about be done at 1.4000, the evidence is to the contrary. Despite all the risks and uncertainties inherent in the outline agreement reached by EU leaders (and the banks) on Wednesday night, we are not proposing to fade this rally, unlike a majority of traders and buy side market participants within our orbit. Upper-most among those risks are: 1. Increased risk of contagion to Ireland and Portugal in view of the new Greece PSI plan; fear that Italy may not deliver on the promises made ahead of Wednesday’s summit; news out of China that deflates hopes for meaningful participation in the proposed SPIV that forms a key plank of the proposals to leverage up the EFSF. In regards to the latter the FT Thursday was suggesting that China may ask for conditions before a putative EUR50-100bn investment. In the absence of adverse development on any of these fronts, we might have to look to the ECB next week and a surprise rate cut to take some of the steam out of the euro. Yet that is some way away, and there is, in any event, risk that the FOMC pre-empts whatever impact the ECB might have when it meets the day before the ECB.
- EURCHF sell-off a conundrum; or maybe a screaming buying opportunity
Perhaps the most curious G10 FX move on Thursday was the move in EURCHF in the opposite direction to EURUSD. We struggle to believe this was ‘risk off’ flows or an attempt to nay say the EURUSD rally given what is occurring not just in EURUSD but in equities and commodity currencies through to local markets. We have been looking for EURCHF to ride on the coattails of the EURUSD rally, a view in which we have not been alone. Since we have no doubt of SNB resolve to ensure that the 1.20 target floor is not threatened – and an expected further fall in the Swiss KoF leading indicator on Friday should reinforce this view – we still regard EURCHF as a buy at the 1.22 handle.
- US Q3 GDP confirms a positive start to H2 2011; we are bullish on CAD
US Q3 GDP proved that H2 2011 is starting out on firmer footing, with the economy growing 2.5%q/q saar up from 1.3% in Q2. The acceleration in Q3 was mainly driven by stronger-than-expected consumption growth (2.4%) as well as investment in equipment and software which surged 17.4%. Despite stronger-than-expected growth in Q3, we expect a significant markdown to 2011 FOMC growth projections next week, which factors in a strong rebound in the pace of growth in H2. A lower growth outlook means less progress on their mandates, which is why we could see a change in Fed communication next week, e.g. inflation/employment targeting. This would drive Treasury rates even lower and keep USD under pressure particularly against commodity currencies. We reiterate our bullish CAD view and look to sell USDCAD on any rebounds.
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BNP Paribas
Corporate & Investment Banking