The USD comeback likely to short-lived
We expect Thursday’s trend of USD strength, triggered at first by slightly softer China data, to be a reflection of profit taking in quiet markets, rather than a perception that the USD is becoming a more highly favoured currency. Our latest FX positioning analysis shows that positioning in the USD has moved from extreme net long to a neutral positioning – this corresponded to a more two-way market for the USD going forward. Moving towards Jackson Hole at the end of the month we expect to see more policy discussion on prospects for open-ended QE, named QEX. Our economists place a 25% probability to the Fed announcing QEX in September. We therefore expect downward pressure to remain the USD and this week entered at long EURUSD recommendation at 1.2320 targeting a move to 1.28 as eurozone stress also abates.
Canadian employment and Norwegian CPI on the calendar today
Following CAD’s stellar performance in recent days following BoC Governor Carney’s hawkish remarks, today focus turns to the Canadian employment data. However, the report may leave the CAD retracing some of its gains. We expect a modest increase in the unemployment rate in July, as the public sector sheds jobs, but the private sector should add a few jobs. Overall, the report is likely to reflect slower economic growth. However, we remain positive on the CAD and continue to hold short USDCAD positions, targeting 0.9800.
Norwegian CPI a tad softer, but market pricing suggests scope for NOK to strengthen
Today’s Norwegian CPI release is likely to indicate a small decline in Norwegian inflation with CPI-ATE falling to 1.1% from 1.2%. While Inflation is below the Norges Bank’s inflation target of 2.5%, domestic conditions continue to strengthen and our economists expect hikes in Q1 2013 – in line with the Norges Bank guidance. However, rates markets continue to price in a 60% probability for a cut by year-end, providing scope for the NOK to continue to strengthen as market expectations adjust. We entered a long NOKSEK recommend this week, targeting a move to 1.1700 driven by bullish technical signals, easing eurozone stress and positioning. See the FX Weekly: Positioning for Easy Money and EZing Stress, 09 August 2012 for more details).
China data continues to signal more need for easing, putting a floor under commodity FX
With China July data coming in on the softer side of expectations this week, policymakers will have to ramp up their policy efforts, and further policy easing is likely in the weeks ahead. Friday morning’s China trade data showed more of the same – that export growth continues to slow, while import growth improves. In FX this has lead to a knee-jerk sell-off in AUD. The AUD also softened in response to the RBA Policy Statement which highlighted that the impact that a strong Aussie may be having on the economy, while forecasts revisions were mixed – GDP forecasts for this year were revised higher this year and lower for 2013. Nevertheless, we expect that further policy action is likely as the Chinese government has prioritised growth. Thus, commodity currencies should find support on further policy easing going forward.
US trade data lend to upward revision in Q2 GDP
Thursdays US trade data points towards an upward revision to Q2 GDP. Real goods exports improved, while real imports declined. The upside surprise in GDP means that the second estimate for Q2 GDP growth will likely show an upward revision to 1.9% q/q saar from 1.5% in the advance estimate. June’s export performance looks very robust but, given the global backdrop, such growth is unlikely to be sustained. The revision to the GDP does not change our view on Fed policy since growth remains subdued. We expect that a slightly stronger US economy that previously expected, combined with Fed easing, should continue to push USDCAD lower.
BNP Paribas