* EUR recovery to be tested by eurozone GDP release
EUR has continued to hold up well despite a barrage of negative political headlines, such as German press reports suggesting the German constitutional court ruling (Sep 12) on ESM and fiscal union could be further delayed. The price action plays to our view that EUR/G4 crosses (EURUSD, EURUSD and EURJPY) are much more vulnerable to upside surprises on a 4-6 week view, as opposed to downward surprises. We continue to hold a long EURUSD recommendation targeting 1.2800 last week. A test to this trading strategy could come from resurging expectations of an ECB rate cut (typically EUR –ve) next month, which could be promoted by weaker eurozone GDP data (10:00 BST) today where we expect a -0.3% q/q reading ; the weaker out turn for German Q2 GDP (+0.5% y/y ; slowest annual growth rate since Dec-09) suggests that even the strongest link within the euro area continues to weaken. Moreover, Sentiment surveys and hard data activity during Q2 suggest a negative outcome for Q2. But we broadly retain our view that EUR-crosses like EURUSD,EURJPY and EURGBP remain prone to upside risks given expectations the ECB may act in the future to lower peripheral sovereign debt yields (though conditional on politicians acting). The other release i.e. German ZEW Survey should also reiterate the same underlying weakening trend.
* USDJPY tipside vulnerable on stronger US retail sales release
US July Retail Sales should post marginal gains (0.2%m/m) for the first time in three months. Core retail sales are also expected to rebound after steadily decelerating from very strong readings earlier in the year. This could support USDJPY and JPY crosses, with JPY net long positioning close to reaching stretched levels as per the CFTC. But bigger picture, USD remains vulnerable should the market begin to ponder the potential effects of an “open-ended” QE which is beginning to gain favour amongst a section of the FOMC. Thus the USD could become more sensitive to how other FOMC members feel about such a policy. We would keep an eye on comments from FOMC neutral member Kocherlakota (who speaks twice this week). Our economists continue to see a 65% chance of Fed easing at the September FOMC meeting.
* Weaker Swedish data may help NOKSEK stabilise higher
Both Swedish CPI and industrial production may augment the recent retracement in long SEK positions. We expect a decline in both CPI and CPIF annual inflation for the month of July. Industrial production is likely to slow for the month of June compared to the previous month. The weakness in the economy supports our economists’ expectations that the Riksbank will likely deliver a 25bp rate cut in October, as it gathers evidence that the economy is slowing. This should likely lead to an unwinding of long SEK positions. Based on our FX positioning analysis, SEK long positions have reached an extreme, and a potential correction is almost inevitable. That said, we reiterate our long NOKSEK position, targeting 1.1700. Also in Europe, UK CPI should continue on its downward path with CPI coming in at -0.1%m/m and 2.3%y/y. Such data strengthen our view that the BoE will proceed with QE in November, as well as a 25bp cut. While this may harm the GBP in the short term, we remain bullish on the GBP in the medium to longer term, as monetary stimulus will support growth in the UK.
BNP Paribas