* EUR a tad lower despite positive mood music
While the mood in financial markets continues to remain optimistic (glass half-full, not half empty), EURUSD is down about 60 pips closer towards 1.2300, the lowest since Friday. There is no clear reason for the move with positive price action continuing to be seen in banking indices, senior financial CDS and most importantly both Spain and Italian bonds, with yields still marginally lower from yesterday. If anything, the news is still marginally constructive, with ECB Noyer reiterating the ECB message of late that (a) they should be ready to intervene “very quickly” and buy bonds in secondary market and (b) could use significant unconventional measures. Not much in terms of catalysts data-wise, where we have US trade and jobless claims; the latter expected to tick slightly higher.
* Favourable China data mix sees AUD outperform
The AUD, while looking overbought, has continued to remain well supported with a more favourable China growth mix and re-think on RBA rate pricing playing a part. Today’s China data collectively underscore that the accelerated monetary stimulus (two china lending rate cuts since June) was as much (if not more) about much slower inflation allowing the Chinese authorities to act, rather than extreme concern over growth. China CPI fell sharply (1.8% vs. 2.2 from June) with pipeline pressures falling massively (-2.9% y/y vs. -2.1% y/y in June). Activity data (retail sales, IP, FAI) all came in a touch softer but not enough to derail expectations that growth will base and move higher from hereon. FX-wise, this should allow commodity currencies to hold in well here. Also, the still resilient labour data from Australia (14K vs. 10K, lower jobless rate) play to the RBA’s slightly more neutral statement released earlier this week. 1Y ahead pricing for RBA rate cuts has already come off (-50bps vs. -75bps last week) which should allow AUD to outperform on the crosses too.
BoJ a non-event today; but September easing expectations see JPY longs prone to reversal
The Bank of Japan left policy unchanged today, in line with broad consensus. There hasn’t been too much of a JPY reaction with little event risk option premia having been built into the event before hand. While the BoJ held its economic assessment unchanged, it downgraded its view on exports and production. In the weeks ahead, expectations of BoJ easing could pick up with politics now moving closer in line. Reports that PM Noda has won backing for tax legislations from the opposition parties (in return for holding elections) will re-focus attention on future BoJ easing prospects. Assuming the consumption tax debate is settled to a degree the BoJ finds satisfactory, the 19 September BoJ meeting could be significant, especially since it is a week after the FOMC meeting (13 September). Net JPY longs (CFTC) are nearing stretched levels, so positioning could become more favourable for topside on JPY-crosses. BNP Paribas STEER also indicates that the recent rise in risk appetite, which is typically a negative for the yen, could also lead to move higher in USDJPY (see chart). The model suggests spot should be trading about 2% higher from current levels.
* Still bearish EURGBP multi-month, but upside risks remain for now
Yesterday’s BoE Inflation Report may see market expectations of a November rate cut recede somewhat, but it still leaves the door open for QE in November. For EURGBP direction, we emphasise broader euro area stress more as a driver rather than BoE policy expectations. Our rates team continue to believe that risk premia could continue to decline in the weeks ahead following from ECB Draghi’s speech last week. This has typically been bullish EUR/G4 crosses (EURUSD, EURGBP, and EURJPY) as we explained in last week’s FX Weekly. We continue to remain weary of upside risks to EURGBP in the weeks ahead (in tandem with EURUSD). But we look for better levels to re-position our multi-month bearish EURGBP view.
BNP Paribas