*Political events in Europe to further restore confidence in the EUR
The EUR has held onto Tuesday’s rebound but is currently struggling to break above a key technical resistance level at 1.2478 (the 61.8% Fibonacci Retracement level). A break above this level opens the way for EURUSD moving up towards its next resistance at 1.2594. Meanwhile, the lack of a rebound in the commodity currencies and large moves in EURAUD, EURCAD and EURNZD continues suggest that the recent price action reflects a squeeze of short EUR positioning amid low liquidity summer markets. We expect that the FOMC minutes could drive a rebound in commodity currencies (see further details below), while European political events over the days ahead may continue to provide the EUR with support. Today Greek Prime Minister Antonis Samaras kicks off his meetings with European officials by meeting President of the Eurogroup Jean Claude Juncker at 1700 LND time. On Thursday Merkel and Hollande hold talks over dinner at 1800 LND time and will release a press statement afterwards. Samara will then meet with Merkel on Friday and Hollande on Saturday to negotiate an extension of Greece’s fiscal targets. Merkel is also scheduled to be interviewed on German television on Sunday. Our economists view that more leniency could be provided to Greece, although by lowering interest rates charged on loans and extending maturities, rather than altering Greece’s fiscal targets. However, any changes in Greece’s conditions are unlikely to be agreed upon soon – more likely timing is after the Troika’s progress report in October. We continue to recommend long EURUSD targeting 1.28 and are comfortable with this position being held during the events over the days ahead given that scope for a further squeeze in EUR crosses remains.
* Dovish FOMC minutes may further undermine the USD
The focus today in the US will be on the FOMC minutes release (from the 1 Aug meeting) as the market looks for clues as to whether or not the Fed is ready to pull the QE trigger. Last month’s FOMC minutes (from the 20 June meeting) resulted in a risk-off tone, with the USD gaining ground. The reason for this was the minutes did not give the green light for QE3: Some members believed more stimulus was necessary; others felt it depended on the economy weakening further. Today’s release is likely to have a more dovish tone given that the FOMC would have seen a sub-100k NFP number (the third straight reading) over the month, contractionary ISM and very weak retail sales data. Meanwhile, the recent headline positive surprises in the US data have occurred after the Fed’s meeting. A dovish stance should provide further weakness US dollar weakness, especially against the commodity currencies.
* Remain long NOKSEK as EURSEK and EURNOK start to move higher
NOKSEK has come off its lows in recent days and we continue to hold our long NOKSEK recommendation, targeting 1.1700. Norwegian unemployment remained unchanged at 3% today (slight stronger than market expectations). Thursday’s GDP release will be more important for NOK and should signal a strong underlying economy. Furthermore, both EURSEK and EURNOK have lost their downward momentum recently. We view that EURSEK has the most scope for positioning being squeezed, which should help to drive NOKSEK higher.
* New Zealand trade data on Thursday may provide upside support to AUDNZD
NZDUSD has had a considerable rally since the beginning of June. The optimism on NZD has been predicated on both robust domestic data and global risks abating. But, the trade data on Thursday morning may begin to reveal the impact of the weak global growth environment on the economy. New Zealand is expected to post its first trade deficit since January of this year, and both exports and imports are likely to decline. Such data may mean that AUDNZD regains some of its recent losses.
BNP Paribas