* FX to more clearly price in QE3; EURUSD the best vehicle at present
As anticipated, the FOMC minutes yesterday came in on the dovish side and saw the USD weaken against both EUR and JPY. It now appears that the markets are truly beginning to ponder QE3 more seriously; the sharp pullback lower in the US 10Y yield (now 1.70% vs. 1.86% yesterday) and the breakout acceleration in gold (XAUUSD) play to this view. This suggests to us that the USD can continue to weaken which is very much consistent with our economist’s call for further QE3 come September. However, with EUR short-covering risks a clear and present danger, EURUSD may be the best vehicle to play this move and we remain comfortable with our long recommendation targeting 1.2800. The commodity currencies continue to lag however, with EURAUD moving higher in tandem with EURUSD. Today’s very poor preliminary China HSBC PMI (headline 9-month low, export-orders at lowest since March 09) may suggest this remains the case. Headline risk will continue to be the main driver of the EUR through the end of the week. Greek PM Samaras’s meetings with German Chancellor Merkel and French President Hollande. But Merkel has already toned down expectations for a conclusion come Friday, stating that any decision to lighten the Greek austerity programme may not come before the Troika review which in September. European PMIs can colour trading in our session (more below). Our economists forecast further weakness, due to the significant headwinds to growth. In addition, euro zone consumer sentiment is also set to decline for August.
* Dovish FOMC minutes puts the USD under pressure
The FOMC minutes were quite dovish and are consistent with our economists’ view that QE3 is more likely than not in September. The key sentence in the minutes was that “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery”. This language is quite similar to that prior to both the implementation of Operation Twist and QE2. But the key will be whether or not Fed Chairman Ben Bernanke is among the many members who thinks additional monetary accommodation would be warranted fairly soon. We will have to wait until the Jackson Hole conference to get the answer to that question. Nonetheless, the Fed has set the bar very high for not doing QE, highlighting that incoming data would need to point to a substantial and sustainable strengthening in the pace of the economic recovery.
* NOKSEK likely to see gains on positive GDP data
NOKSEK continues to rise, and today’s GDP number may be the catalyst that boosts it higher. Mainland GDP should continue to expand in Q2, driven by robust domestic demand. Such data will set Norway apart from the rest of the advanced economies that continue to struggle. Thus, we remain confident in our long NOKSEK recommendation, targeting 1.1700. New Zealand trade data due out this 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 will regain some of its recent losses.
* China PMI disappoints; Should see anticipation of Chinese policy easing pick up
The HSBC Flash China PMI fell to 47.8 in August, its lowest level since November, from 49.5 in July. The new export orders sub-index at 44.7 – the worst showing since March 2009. Particularly concerning was the weak performance on the exports front (export sub-index at Mar 09 low). Expectations of a strong policy response should pick up from hereon in and perhaps explain why Chinese stocks continue to hold in well . Indeed, PBOC Governor Zhou Xiaochuan said adjustments to interest rates and banks’ reserve requirements are still possible even after the CB conducted a large reverse repo (temporary cash injection).
BNP Paribas